Bond Finance, Bank Credit, and Aggregate Fluctuations in an Open Economy

56 Pages Posted: 15 Aug 2016 Last revised: 13 Dec 2017

See all articles by Roberto Chang

Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics; National Bureau of Economic Research (NBER)

Andrés Fernàndez

Inter-American Development Bank (IDB) - Research Department

Adam Gulan

Bank of Finland - Research

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Date Written: August 5, 2016

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.

JEL Classification: E32, E44, F41, G31

Suggested Citation

Chang, Roberto and Fernandez, Andres and Gulan, Adam, Bond Finance, Bank Credit, and Aggregate Fluctuations in an Open Economy (August 5, 2016). Bank of Finland Research Discussion Paper No. 22/2016, Available at SSRN: https://ssrn.com/abstract=2822734

Roberto Chang (Contact Author)

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andres Fernandez

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Adam Gulan

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

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