2015/01/01 by Markus K. Brunnermeier, Yuliy Sannikov · 1 citation
Economics, Econometrics and Finance · #Economic theories and models #Economic Theory and Policy #Global Financial Crisis and Policies
paper · doi:10.1257/mac.20140054
openalex publication_date 2015/01/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/06/26
This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too much since each firm does not internalize that an increase in production capacity undermines their output price, worsening their terms of trade. From an ex ante perspective each firm undermines the natural “terms of trade hedge.” Second, sudden stops and fire sales lead to sharp price drops of illiquid capital. Capital controls or domestic macro-prudential measures that limit short-term borrowing can improve welfare. (JEL F32, F43, G15, O41)