Banking globalization and international business cycles: Cross-border chained credit contracts and financial accelerators

Research output: Contribution to journalArticle

27 Citations (Scopus)

Abstract

This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking cross-border borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis.

Original languageEnglish
Pages (from-to)1-16
Number of pages16
JournalJournal of International Economics
Volume86
Issue number1
DOIs
Publication statusPublished - 2012 Jan
Externally publishedYes

Fingerprint

International business cycles
Globalization
Financial accelerator
Cross-border
Credit
Banking
Financial intermediaries
Entrepreneurs
Financial crisis
Borrowing
DSGE models
Business cycle synchronization
Lending
Credit constraints
Investors
Net worth

Keywords

  • Business cycle synchronization
  • Contagion
  • Correlation (quantity) puzzle
  • Financial accelerator
  • Financial intermediaries
  • Monetary policy

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

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