Credit Market Imperfections in Middle Income Countries

35 Pages Posted: 19 Jun 2003

See all articles by Aaron Tornell

Aaron Tornell

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

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Date Written: June 2003

Abstract

In this paper we document three credit market imperfections prevalent in middle income countries that can help to explain boom-bust cycles, as well as other macroeconomic patterns observed at higher frequencies across these countries. These imperfections are: the existence of financing constraints that affect mainly the nontradables sector, currency mismatch and guarantees that cover lenders against systemic crises. In MICs T-sector firms have access to international capital markets, while most N-firms are bank-dependent and are financially constrained. Systemic guarantees generate incentives for borrowers to take on insolvency risk by denominating debt in foreign currency. This currency mismatch makes movements in the real exchange rate - the relative price between N and T goods - the driving element in the amplification of shocks.

JEL Classification: E32, F32, G15, O16

Suggested Citation

Tornell, Aaron and Westermann, Frank, Credit Market Imperfections in Middle Income Countries (June 2003). CESifo Working Paper Series No. 960. Available at SSRN: https://ssrn.com/abstract=417343

Aaron Tornell (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Frank Westermann

University of Osnabrueck - Department of Economics ( email )

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Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

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Munich, 01069
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