nep-ifn New Economics Papers
on International Finance
Issue of 2015‒01‒19
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  2. International Credit Flows and Pecuniary Externalities By Markus K. Brunnermeier; Yuliy Sannikov

  1. By: Šerif Šaboviæ, Vuk Miletiæ (Faculty of Economics Pristina in Kosovska Mitrovica; University Union Nikola Tesla, Belgrade)
    Abstract: For the majority of international investors, country's risk and sovereignty risk are the greatest risks. Country's risk usually includes political and economic uncertainty. Transition countries are characterized by big budget deficit, inflation, domestic currrency appreciation, inconstant exchange terms, low accumulation, limits and market restrictons. Special risk type is market concentration and monopoly. Other factors increasing foerign capital investment in transition countries are payment risk, market risk, operating risk, off-balance sheet risks, consolidation and convergence, money laundering, off-shore business, inadequate prudential control of banks and other financial mediators, outstanding corruption and criminal. Due to sinergetic action of these factors, transition states may be exposed to the risk of international reputation decrease.
    Keywords: transition countries, country's risk and sovereignty risk, political and economic uncertainty, joint investments, managing foreign investment risk.
    JEL: E22 G32
    Date: 2014–09
  2. By: Markus K. Brunnermeier; Yuliy Sannikov
    Abstract: 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.
    JEL: F32 F43 G15 O41
    Date: 2014–12

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