Bond finance,bank credit,and aggregate fluctuations in an open economy |
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| Institution: | 1. Rutgers University, United States;2. NBER, United States;3. Inter-American Development Bank, United States;4. Bank of Finland, Finland;1. Federal Reserve Bank of Minneapolis, United States;2. NBER, United States;1. Boston University, United States;2. CEPR;1. University of Miami School of Business Administration, 5250 University Drive, 512-A Jenkins Bldg., Coral Gables, FL 33124, USA;2. University of Miami, USA;3. University of Oslo, Norway;4. University of Southampton, UK;1. Federal Reserve Bank of Minneapolis, United States;2. CEPR, United Kingdom |
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| Abstract: | Corporate sectors in emerging markets have noticeably increased their reliance on foreign financing, presumably reflecting low global interest rates. The evidence also shows a rebalancing from bank loans towards bonds. To study these developments, we develop a dynamic open economy model where these modes of finance are determined endogenously. The model replicates the stylized facts following a drop in world interest rates; in particular, rebalancing towards bonds occurs because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. More generally, the model is suitable for studying interactions between modes of finance and the macroeconomy. |
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| Keywords: | Emerging markets Corporate debt Bonds Bank credit |
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