Bond finance, bank credit, and aggregate fluctuations in an open economy

• Published in: Journal of monetary economics Vol. 85; pp. 90 - 109
• Main Authors: Chang, Roberto, Fernández, Andrés, Gulan, Adam
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.01.2017
• Subjects: Bank credit; Bonds; Corporate debt; Emerging markets; Bank credit; Corporate debt; Bonds; Emerging markets
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2016.10.009

Corporate sectors in emerging markets have noticeably increased their reliance on foreign financing, presumably reflecting low global interest rates. The evidence also shows a rebalancing from bank loans towards bonds. To study these developments, we develop a dynamic open economy model where these modes of finance are determined endogenously. The model replicates the stylized facts following a drop in world interest rates; in particular, rebalancing towards bonds occurs because bank credit becomes relatively more expensive, reflecting the scarcity of bank equity. More generally, the model is suitable for studying interactions between modes of finance and the macroeconomy. •Emerging market corporates have considerably increased their reliance on foreign debt.•Foreign debt has grown via bank loans and, more importantly, via direct bond issuance.•A dynamic framework is developed where modes of finance are endogenously determined.•Following favorable external interest rate shocks bonds become relatively cheaper.•Model suitable for studying linkages between modes of finance and the macroeconomy.