On the Role of the Collateral Constraint Friction in the North–South Transmission of the 2008–2009 Financial Crisis

This paper assesses the role of a popular collateral constraint–based transmission mechanism in the North–South transmission of the 2008–2009 financial crisis. Theoretically, in the presence of collateral constraints, depressed asset prices caused by a negative shock in a large creditor country gene...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2022-03, Vol.54 (2-3), p.707-728
Main Author: Nguyen, Ha M.
Format: Article
Language:English
Subjects:
Collateral
collateral constraints
Collaterals
Economic crisis
financial crises
International finance
North and South
Prices
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Summary:This paper assesses the role of a popular collateral constraint–based transmission mechanism in the North–South transmission of the 2008–2009 financial crisis. Theoretically, in the presence of collateral constraints, depressed asset prices caused by a negative shock in a large creditor country generate feedback cycles in a smaller debtor country, in which the decline in borrowing capacity and the collapses of investment and output reinforce each other. I find that although the mechanism has appealing qualitative features and is consistent with the data, quantitative results from the model can only account for a very small part of the actual output declines.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12801