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Asset pledgeability and international transmission of financial shocks

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  • Trani, Tommaso

Abstract

This paper studies the international transmission of pledgeability shocks, as the recent crisis involved a negative shock to the pledgeability of assets. The paper develops a two-country portfolio model, with leveraged investors, that incorporates this type of shock and a solution approach for the corresponding portfolio choice problem. This approach captures the effect of pledgeability on asset risk premiums. The paper finds that the equilibrium portfolios play a heightened role as transmission channels. Moreover, by complementing the effect of productivity shocks under borrowing constraints, the pledgeability shocks improve the fit of an otherwise standard international macroeconomic model for the G7 countries, especially during crises.

Suggested Citation

  • Trani, Tommaso, 2015. "Asset pledgeability and international transmission of financial shocks," Journal of International Money and Finance, Elsevier, vol. 50(C), pages 49-77.
    • Handle: RePEc:eee:jimfin:v:50:y:2015:i:c:p:49-77
    DOI: 10.1016/j.jimonfin.2014.09.002
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    More about this item

    Keywords

    Macroeconomic interdependence; International portfolio choice; Liquidity shocks;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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