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Heterogeneous global booms and busts

Farboodi, Maryam and Kondor, Peter (2022) Heterogeneous global booms and busts. American Economic Review. ISSN 0002-8282 (In Press)

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Abstract

We investigate the heterogeneous boom and bust patterns across countries that emerge as a result of global shocks. Our analysis sheds light on the emergence of core and periphery countries, and the joint determination of the depth of recessions and tightness of credit across countries. The model implies that interest rates are similar across core and periphery countries in booms, with larger credit and output growth in periphery countries. However, a common global shock that leads to a credit crunch across the globe gives rise to a sharper spike in interest rates and a deeper recession in periphery countries, while a credit flight to the core alleviates the adverse consequences in these countries. We explore the implication of the model about credit spreads, portfolio rebalancing, investment, non-performing debt and concentration of debt ownership during booms and busts, both in the time series and in the cross-section, and connect them to existing stylized facts. We further demonstrate how the anatomy of the global economy evolves as a result of aggregate demand and supply shocks to financing, such as a global saving glut.

Item Type: Article
Official URL: https://www.aeaweb.org/journals/aer
Additional Information: © 2022 American Economic Association
Divisions: Finance
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
Date Deposited: 31 Mar 2022 11:12
Last Modified: 06 Jun 2022 13:03
URI: http://eprints.lse.ac.uk/id/eprint/114547

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