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

56 Pages Posted: 25 Apr 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 Fernández

Inter-American Development Bank (IDB)

Adam Gulan

Bank of Finland - Research

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Date Written: August 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, this paper develops 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.

Keywords: Emerging markets, Corporate debt, Bonds, Bank credit

JEL Classification: E32, E44, F41, G31

Suggested Citation

Chang, Roberto and Fernández, Andrés and Gulan, Adam, Bond Finance, Bank Credit, and Aggregate Fluctuations in an Open Economy (August 2016). IDB Working Paper No. IDB-WP-720, Available at SSRN: https://ssrn.com/abstract=2956700 or http://dx.doi.org/10.2139/ssrn.2956700

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

Andrés Fernández

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue 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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