Cross-Border Credit Intermediation and Domestic Liquidity Provision in a Small Open Economy

September 11, 2018

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Thorvardur Tjoervi Olafsson. Cross-Border Credit Intermediation and Domestic Liquidity Provision in a Small Open Economy, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper develops a small open economy model where global and domestic liquidity is intermediated to the corporate sector through two financial processes. Investment banks intermediate cross-border credit through interlinked debt contracts to entrepreneurs and commercial banks intermediate domestic savings to liquidity constrained final good producers. Both processes are needed to facilitate development of key production inputs. The model captures procyclical investment bank leverage dynamics, global liquidity spillovers, domestic money market pressures, and macrofinancial linkages through which shocks propagate across the two processes, affecting spreads and balance sheets, as well as the real economy through investment and working capital channels.

Subject: Commercial banks, Credit, Domestic credit, Financial institutions, Financial services, Investment banking, Labor, Money, Self-employment

Keywords: Capital producer, Central bank, Commercial bank funding, Commercial banks, Cost of funds, Credit, Credit contracts, Credit market, Cross-border banking flows, Depreciation rate, Domestic credit, East Asia, Financial frictions, Financial intermediation, Funding rate reaction, Global, Idiosyncratic productivity, Interest rate, Investment banking, Investment banking, Liquidity shock, Macrofinancial linkages, Money market, Monopolistic investment banks, Self-employment, Working capital, WP

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/202
Stock No:

WPIEA2018202
ISBN:

9781484373354
ISSN:

1018-5941

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