Asset pledgeability and international transmission of financial shocks
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.