Abstract
AbstractThis 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.
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