Heterogeneous Global Booms and Busts

We investigate how global shocks interacting with information frictions in the international supply of capital generate heterogeneous boom–bust patterns across countries. In our model, firms compete for funding from international investors who differ in their ability to assess borrower creditworthiness. Countries differ in opacity, i.e., how informative investor expertise is for identifying good versus bad firms. In booms, investors are bold and credit markets are integrated: interest rates are similar across countries, periphery receives larger credit inflows and enjoys faster output growth. In busts, investors turn cautious and credit markets fragment: interest rates spike and output drops more in opaque (periphery) countries, while capital rebalances to transparent (core) countries. The model yields implications for credit spreads, portfolio rebalancing, investment, non‑performing debt, concentration of debt ownership, and safe‑asset issuance. It also shows how global demand and supply shocks to financing (e.g., a pandemic shock or a global saving glut) reshape the anatomy of the world economy.

Maryam Farboodi, Péter Kondor