Contagion and Volatility with Imperfect Credit Markets

33 Pages Posted: 15 Feb 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: October 1997

Abstract

This paper interprets contagion effects as an increase in the volatility of aggregate shocks impinging on the domestic economy. The implications of this approach are analyzed in a model with two types of credit market imperfections: domestic banks borrow at a premium on world capital markets, and domestic producers (whose demand for credit results from working capital needs) borrow at a premium from domestic banks. Higher volatility of producers` productivity shocks increases both domestic and foreign financial spreads and the producers` cost of capital, resulting in lower employment and higher incidence of default. Welfare effects are nonlinearly related to the degree of international financial integration.

Keywords: Credit market imperfections, volatility, interest rate spreads

JEL Classification: E44, F32, F34

Suggested Citation

Agenor, Pierre-Richard, Contagion and Volatility with Imperfect Credit Markets (October 1997). IMF Working Paper, Vol. , pp. 1-33, 1997. Available at SSRN: https://ssrn.com/abstract=882677

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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