Econometrica: Mar, 2022, Volume 90, Issue 2

Global Banks and Systemic Debt Crises

https://doi.org/10.3982/ECTA17433
p. 749-798

Juan M. Morelli, Pablo Ottonello, Diego J. Perez

We study the role of global financial intermediaries in international lending. We construct a model of the world economy, in which heterogeneous borrowers issue risky securities purchased by financial intermediaries. Aggregate shocks transmit internationally through financial intermediaries' net worth. The strength of this transmission is governed by the degree of frictions intermediaries face in financing their risky investments. We provide direct empirical evidence on this mechanism showing that around Lehman Brothers' bankruptcy, emerging‐market bonds held by more distressed global banks experienced larger price contractions. A quantitative analysis of the model shows that global financial intermediaries play a relevant role in driving borrowing‐cost and consumption fluctuations in emerging‐market economies, during both debt crises and regular business cycles. The portfolio of financial intermediaries and the distribution of bond holdings in the world economy are key to determine aggregate dynamics.

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Supplemental Material

Supplement to "Global Banks and Systemic Debt Crises"

Morelli, Juan M., Pablo Ottonello, and Diego J. Perez

In this Appendix, we develop and solve an extension of the baseline model in which we allow for trading of securities in secondary markets. This version of the model features the same source of variation as in the empirical analysis. We show that a parameterization of the model that targets cross-sectional empirical estimates from the data delivers quantitative results similar to those in the baseline model.

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