Capital flows under moral hazard
I analyze a model with moral hazard and limited enforcement in a small open economy. I find that when state contingent contracting is allowed adding the moral hazard friction improves the model's predictions along several dimensions. First, it justifies why non-contingent debt is an optimal way to finance an emerging economy. Second, it explains the limited consumption risk-sharing and high, volatile and counter-cyclical interest rates. Third, it generates realistic crisis-like dynamics in which capital inflows are brought to a halt and interest rates sky-rocket. The model also has a strong internal propagation mechanism.
Year of publication: |
2013
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Authors: | Tsyrennikov, Viktor |
Published in: |
Journal of Monetary Economics. - Elsevier, ISSN 0304-3932. - Vol. 60.2013, 1, p. 92-108
|
Publisher: |
Elsevier |
Saved in:
Online Resource
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