the costs from financial globalisation: externalities

Question 1

what are the two main channels for whihc private capital flows can lead to macroeconomic externalities?

Answer 1

percuniary externalites
aggregate demand externalities

Question 2

what are the facts which are observed when emerging economies have been hit by financial crisises?

Answer 2

private sector borrowers had typically taken too much leverage
when they are in difficulty they start to deleverage all at the same time,
leading to asset price declines and exchange rate depreciations
this negatively affects balance sheets by reducing the value of assets
and/or increasing the value of liabilities, leading to a feedback loop and
financial crisis

Question 3

what is the simplified model which shows the pecuniary externality channel?

Answer 3

model with three periods, consumers gain utility both from the consumption of tradeds goods ct and non traded goods cn. in equillibrium the consumption of non traded goods will be equal to the non traded goods output cn=yn.
in period 0, agent i has an endowment of the trade good Yi(T,1) and can trade bonds with the rest of the world bi(1):
Ci(T,0) +qbi(1) = yi(T,0) where q =1/(1+r) is the bond price. bi(1)<0 means that ci(T,0) >Yi(T,0) so country runs a current account defecit.
in period 1, agent i is now endowed with traded good Yi(T,1) and non traded good Yi(N,1) and can once again trade bonds with the rest of the world bi(2):
ci(T,1) +PNci(N,1) +bi(2)/(1+r) = yi(T,1) +PNyi(N,1) +bi(1) where PN is the relative price of non traded goods in terms of traded goods in period 1.
the financial constraint is given by equation bi(2) /R = -k[Yi(t,1) +PN*Yi(N,1)], 0<k1
which means that agents cannot borrow more than a given fraction of their endowment. if PN falls, then agents can take on less borrowing as they have less collateral.
in period 2, the budget constraint is given by Ci(T,2) =yi(T,2) +bi(2) where agents pay back their debt and consume whatever is left.

Question 4

in equillibrium, what is the relative price of non traded good equal to?

Answer 4

it is equal to the marginal rate of substitution between the two goods or
PN =u’[Ci(N,1)]/u’[Ci(T,1)]