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

Download or read book Cross-Border Credit Intermediation and Domestic Liquidity Provision in a Small Open Economy written by Thorvardur T. Olafsson and published by International Monetary Fund. This book was released on 2018-09-11 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.