Financial Crises and Lending of Last Resort in Open Economies

Bocola, Luigi; Lorenzoni, Guido

doi:10.21034/sr.557

Cited by 9 publications

(8 citation statements)

References 44 publications

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“…For example, Kalemli-Ozcan et al 2016and Niepmann and Schmidt-Eisenlohr (2017), among others, document adverse effects of currency depreciations on real and financial variables in the presence of foreign-denominated debt. 4 Our paper is also related to recent influential work by Aoki, Benigno and Kiyotaki (2016), Bocola and Lorenzoni (2017), Corsetti et al (2018), Gabaix and Maggiori (2015), and Bruno and Shin (2015). The distinctive features of our work compared to these papers are that we focus on quantifying the spillovers from U.S. monetary tightening, that we use a two-country medium-scale New Keynesian model augmented with a set of features designed to enhance its quantitative realism, and that we emphasize the transmission arising through endogenous UIP deviations and their interaction with the degree of currency mismatch in balance sheets.…”

Section: Introductionmentioning

confidence: 79%

Balance Sheets, Exchange Rates, and International Monetary Spillovers

Akıncı

Queraltó

2018

SSRN Journal

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We use a two-country New Keynesian model with balance sheet constraints to investigate the magnitude of international spillovers of U.S. monetary policy. Home borrowers obtain funds from domestic households in domestic currency, as well as from residents of the foreign economy (the U.S.) in dollars. In our economy, foreign lenders differ from domestic lenders in their ability to recover resources from borrowers' assets, leading to more severe financial frictions for foreign debt than for domestic deposits. As a consequence, a deterioration in borrowers' balance sheets induces a rise in the home currency's premium and an exchange rate depreciation. We use the model to investigate how spillovers are affected by the degree of currency mismatches in balance sheets, and whether the latter make it desirable for policy to target the exchange rate. We find that the magnitude of spillovers is significantly enhanced by the degree of currency mismatches. Our findings also suggest that using monetary policy to stabilize the exchange rate is not necessarily more desirable with greater balance sheet mismatches and may actually exacerbate short-run exchange rate volatility.

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Section: Introductionmentioning

confidence: 79%

Balance Sheets, Exchange Rates, and International Monetary Spillovers

Akıncı

Queraltó

2018

SSRN Journal

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“…Such financial fragility may reflect concerns regarding the commitment and fiscal viability of policies needed to prevent a run on the banking system in the presence of balance sheet exposure. Bocola and Lorenzoni (2017) provide an insightful model illustrating and explaining these issues in the context of EMs characterized by limited credibility of their fiscal backstop mechanisms. Their framework implies that the "state of fundamentals" (like fiscal space, growth rates, etc.)…”

Section: Introductionmentioning

confidence: 99%

Financial Spillovers and Macroprudential Policies

2020

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and anonymous referees for useful comments. All remaining errors are ours. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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“…There is also strand of literature analyzing empirically the consequences of currency depreciations on firms' balance sheets. See for exampleAguiar (2005);Pratap and Urrutia (2004);Gilchrist and Sim (2007);Bleakley and Cowan (2008); Kalemli-Ozcan, Kamil, and Villegas-Sanchez (2010);Kim, Tesar, and Zhang (2015);Rancière and Tornell (2016); andAlfaro, Alejandro, Fadinger, and Liu (2017).5 In a recent paper,Bocola and Lorenzoni (2017) show that the risk of financial panic and precautionary motives of households can lead to multiple equilibria and to aggregate deviations from UIP Rappoport (2008). shows that households' demand of foreign assets to insurance against real shocks can lead to foreign currency borrowing in the corporate sector.…”

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confidence: 99%

Exchange Rate Exposure and Firm Dynamics

Salomão

Varela

2021

The Review of Economic Studies

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This paper develops a heterogeneous firm-dynamics model to jointly study firms’ currency debt composition and investment choices. In our model, foreign currency borrowing arises from a dynamic trade-off between exposure to currency risk and growth. The model endogenously generates selection of productive firms into foreign currency borrowing. Among them, firms with high marginal product of capital use foreign loans more intensively. We assess econometrically the model’s predicted pattern of foreign currency borrowing using firm-level census data from the deregulation of these loans in Hungary, calibrate the model and quantify the aggregate impact of this financing. Our counterfactual exercises show that understanding the characteristics of firms borrowing in foreign currency is critical to assess the aggregate consequences of this financing.

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Financial Crises and Lending of Last Resort in Open Economies

Cited by 9 publications

References 44 publications

Balance Sheets, Exchange Rates, and International Monetary Spillovers

Balance Sheets, Exchange Rates, and International Monetary Spillovers

Financial Spillovers and Macroprudential Policies

Exchange Rate Exposure and Firm Dynamics

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