International Contagion Through Leveraged Financial Institutions

46 Pages Posted: 25 Dec 2011

See all articles by Eric van Wincoop

Eric van Wincoop

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2011

Abstract

The 2008-2009 financial crises, while originating in the United States, witnessed a drop in asset prices and output that was at least as large in the rest of the world as in the United States. A widely held view is that this was the result of global transmission through leveraged financial institutions. We investigate this in the context of a simple two-country model. The paper highlights what the various transmission mechanisms associated with balance sheet losses are, how they operate, what their magnitudes are and what the role is of different types of borrowing constraints faced by leveraged institutions. For realistic parameters we find that the model cannot account for the global nature of the crisis, both in terms of the size of the impact and the extent of transmission.

Suggested Citation

van Wincoop, Eric, International Contagion Through Leveraged Financial Institutions (December 2011). NBER Working Paper No. w17686, Available at SSRN: https://ssrn.com/abstract=1976482

Eric Van Wincoop (Contact Author)

University of Virginia - Department of Economics ( email )

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