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Financial Frictions in the Global Economy

Paper Session

Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, America's Cup C
Hosted By: International Economics and Finance Society
  • Chair: Sebnem Kalemli-Ozcan, University of Maryland

On the Welfare Losses from External Sovereign Borrowing

Mark Aguiar
,
Princeton University
Manuel Amador
,
Federal Reserve Bank of Minneapolis
Stelios Fourakis
,
University of Minnesota

Abstract

This paper studies the losses to the citizenry when the private agents discount the future at different rates than their government. In the presence of such a disagreement, the private sector may prefer an environment in which the government is in financial autarky. Using a sequence of sovereign debt models, the paper quantifies the potential welfare losses that citizens suffer from the government's access to international bond markets.

Liquidity Rules and Credit Booms

Kinda Hachem
,
University of Virginia
Zheng Michael Song
,
Chinese University of Hong Kong

Abstract

We show that stricter bank liquidity standards can trigger unintended credit booms when there is heterogeneity in interbank pricing power. Attempts to circumvent the regulation change the allocation of savings across institutions, eliciting strategic responses that also change the allocation of lending across markets. More credit is generated per unit of savings in the new equilibrium. A quantitative application to China illustrates the practical relevance of the mechanisms in our model.

Global vs. Local Banking: Firm Financing in a Globalized Financial System

Leslie Sheng Shen
,
University of California-Berkeley

Abstract

This paper provides a new theory of firm financing in financial systems with both global and local banks, and tests it using cross-country loan-level data. I point out that the traditional theory in corporate finance and banking of firm-bank sorting based on hard versus soft information does not explain the sorting patterns between firms and banks in a globalized financial system. Instead, I argue that global banks have a com- parative advantage in extracting global information, and local banks have a comparative advantage in extracting local information. I formalize this view in a model in which firms have returns dependent on global and local risk factors, and each bank type can observe only one component of the firms’ returns. This double information asymmetry creates a segmented credit market with a double adverse selection problem: in equilibrium, each bank lends to the worst type of firms in terms of the unobserved risk factors. Moreover, when one of the bank types faces a funding shock (e.g., a monetary policy shock), the adverse selection affects credit allocation across firms at both the extensive and intensive margins, generating spillover and amplification effects through adverse interest rates. I test the theory using detailed firm-bank micro data and empirical strategies that tightly map to the model set-up. I find firm-bank sorting patterns, and effects of US and Euro area monetary policy shocks on firm financing, that support the model predictions. This evidence reveals a novel adverse selection channel of international transmission.

Fiscal Multipliers and Foreign Holdings of Public Debt

Alberto Martin
,
European Central Bank, CREI, and Barcelona GSE
Fernando Broner
,
CREI and Pompeu Fabra University
Daragh Clancy
,
European Stability Mechanism
Aitor Erce
,
European Stability Mechanism

Abstract

This paper explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. Thus, these crowding-out effects are likely to be weaker when public debt is purchased by foreigners. We test this hypothesis on (i) post-war US data and (ii) data for a panel of 17 advanced economies from the 1980's to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for a large set of advanced economies. We combine this data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950's and 1960's and Japan today, and larger than one when the foreign share is high, such as in the U.S. and Ireland today.
JEL Classifications
  • F3 - International Finance