Balance Sheet Effects, Bailout Guarantees and Financial Crises
This paper provides a model of boom-bust episodes in middle-income countries. It is based on sectoral differences in corporate finance: the nontradables sector is special in that it faces a contract enforceability problem and enjoys bailout guarantees. As a result, currency mismatch and borrowing constraints arise endogenously in that sector. This sectoral asymmetry allows the model to replicate the main features of observed boom-bust episodes. In particular, episodes begin with a lending boom and a real appreciation, peak in a self-fulfilling crisis during which a real depreciation coincides with widespread bankruptcies, and end in a recession and credit crunch. The nontradables sector accounts for most of the volatility in output and credit. Copyright 2004 The Review of Economic Studies Ltd.
Year of publication: |
2004
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Authors: | SCHNEIDER, MARTIN ; TORNELL, AARON |
Published in: |
Review of Economic Studies. - Wiley Blackwell, ISSN 0034-6527. - Vol. 71.2004, 07, p. 883-913
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Publisher: |
Wiley Blackwell |
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