TY  - JOUR
AU  - Brunnermeier, Markus K
AU  - Sannikov, Yuliy
TI  - International Credit Flows and Pecuniary Externalities
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 20803
PY  - 2014
Y2  - December 2014
DO  - 10.3386/w20803
UR  - http://www.nber.org/papers/w20803
L1  - http://www.nber.org/papers/w20803.pdf
N1  - Author contact info:
Markus K. Brunnermeier
Princeton University
Department of Economics
Bendheim Center for Finance
Princeton, NJ 08544
Tel: 609/258-4050
Fax: 609/258-0771
E-Mail: markus@princeton.edu

Yuliy Sannikov
Stanford GSB
Stanford University
Palo Alto, CA
E-Mail: sannikov@gmail.com
M1  - published as Markus K. Brunnermeier, Yuliy Sannikov. "International Credit Flows and Pecuniary Externalities," in Mark Gertler, organizer, "Lessons from the Financial Crisis for Monetary Policy" American Economic Journal: Macroeconomics, Volume 7, no. 1 (2015)

AB  - This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too much since each firm does not internalize that an increase in production capacity undermines their output price, worsening their terms of trade. From an ex-ante perspective each firm undermines the natural “terms of trade hedge.” Second, sudden stops and fire sales lead to sharp price drops of illiquid capital. Capital controls or domestic macro-prudential measures that limit short-term borrowing can improve welfare.
ER  -