Vortrag
Business Cycles and Financial Intermediation in Emerging Economies

Christoph Große Steffen

16th Annual International Conference on Macroeconomic Analysis and International Finance
Rethymno, Griechenland, 24.05.2012 - 26.05.2012



Abstract:
This paper explores the quantitative role of financial market frictions on capital flows and the business cycle in emerging markets. A financial sector in close analogy to Gertler and Karadi (2011) is embedded in an otherwise standard neoclassical model of a small open economy. An agency problem between international investors and domestic banks gives rise to an endogenously determined leverage ratio. Along with a traditional productivity shock, international investors appetite for emerging market assets is introduced as an exogenous disturbance. I find that the amount of attractable external funds that the financial sector can extend to the domestic economy depends on bank capital and investment behavior of foreigners. Domestic banks amplify the external funding squeeze to the real economy which leads to higher output volatility in case of financial openness. A calibrated version of the model fits key Mexican real and financial sector business cycle moments.