Heterogeneous Global Booms and Busts

This paper investigates heterogeneous boom and bust patterns across countries resulting from global shocks. A model is developed showing that interest rates are similar across core and periphery countries during booms, with greater credit and output growth in periphery nations. However, global credit crunches cause sharper interest rate spikes and deeper recessions in periphery countries, while core countries experience a credit flight that mitigates adverse effects. The model explores implications for credit spreads, portfolio rebalancing, investment, non-performing debt, and debt ownership concentration, connecting them to stylized facts. The paper also demonstrates how the global economy's structure evolves due to aggregate demand and supply shocks to financing, such as a global saving glut.

Maryam Farboodi, Péter Kondor