International capital flows and credit market imperfections: A tale of two frictions

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Journal of International Economics, 89(2), 441-452, 2013
To cite or link this document: Martin, Alberto Taddei, Filippo
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa 2010-11-01
dc.identifier.citation Journal of International Economics, 89(2), 441-452, 2013
dc.description.abstract The financial crisis of 2007-08 has underscored the importance of adverse selection in financial markets. This friction has been mostly neglected by macroeconomic models of financial imperfections, however, which have focused almost exclusively on the effects of limited pledgeability. In this paper, we fill this gap by developing a standard growth model with adverse selection. Our main results are that, by fostering unproductive investment, adverse selection: (i) leads to an increase in the economy?s equilibrium interest rate, and; (ii) it generates a negative wedge between the marginal return to investment and the equilibrium interest rate. Under financial integration, we show how this translates into excessive capital inflows and endogenous cycles. We also extend our model to the more general case in which adverse selection and limited pledgeability coexist. We conclude that both frictions complement one another and show that limited pledgeability exacerbates the effects of adverse selection.
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 1245
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.title International capital flows and credit market imperfections: A tale of two frictions
dc.type info:eu-repo/semantics/workingPaper 2016-06-04T02:51:11Z
dc.subject.keyword Macroeconomics and International Economics
dc.subject.keyword limited pledgeability
dc.subject.keyword adverse selection
dc.subject.keyword international capital flows
dc.subject.keyword credit market imperfections
dc.rights.accessRights info:eu-repo/semantics/openAccess

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