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

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• dc.contributor.author Martin, Alberto, 1974-
• dc.contributor.author Taddei, Filippo
• dc.date.accessioned 2024-03-08T11:45:54Z
• dc.date.available 2024-03-08T11:45:54Z
• dc.date.issued 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, 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 international 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.description.sponsorship Martin acknowledges support from the Spanish Ministry of Science and Innovation (grant Ramon y Cajal RYC-2009-04624), the Spanish Ministry of Economy and Competitivity (grant ECO2011-23192), the Generalitat de Catalunya-AGAUR (grant 2009SGR1157) and the Barcelona GSE Research Network. Taddei acknowledges financial support from Collegio Carlo Alberto through 2011 Research Grants.
• dc.format.mimetype application/pdf
• dc.identifier.citation Martin A, Taddei F. International capital flows and credit market imperfections: a tale of two frictions. Journal of international economics. 2013 Mar;89(2):441-52. DOI: 10.1016/j.jinteco.2012.02.003
• dc.identifier.doi http://dx.doi.org/10.1016/j.jinteco.2012.02.003
• dc.identifier.issn 0976-0792
• dc.identifier.uri http://hdl.handle.net/10230/59364
• dc.language.iso eng
• dc.publisher Elsevier
• dc.relation.ispartof Journal of international economics. 2013 Mar;89(2):441-52
• dc.relation.projectID info:eu-repo/grantAgreement/ES/3PN/ECO2011-23192
• dc.rights © Elsevier http://dx.doi.org/10.1016/j.jinteco.2012.02.003
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.subject.keyword Limited pledgeability
• dc.subject.keyword Adverse selection
• dc.subject.keyword International capital flows
• dc.subject.keyword Credit market imperfections
• dc.title International capital flows and credit market imperfections: a tale of two frictions
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/acceptedVersion