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

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  • Ueda, Kozo

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 86 (2012)
Issue (Month): 1 ()
Pages: 1-16

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Handle: RePEc:eee:inecon:v:86:y:2012:i:1:p:1-16

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: Financial accelerator; Financial intermediaries; Correlation (quantity) puzzle; Business cycle synchronization; Contagion; Monetary policy;

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References

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Citations

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Cited by:
  1. Luca Guerrieri & Matteo Iacoviello & Raoul Minetti, 2012. "Banks, Sovereign Debt and the International Transmission of Business Cycles," NBER Working Papers 18303, National Bureau of Economic Research, Inc.
  2. Mikhail Stolbov, 2014. "International Credit Cycles: A Regional Perspective," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 21-47.
  3. Gustavo Adler, 2012. "Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis," IMF Working Papers 12/178, International Monetary Fund.
  4. Dedola, Luca & Karadi, Peter & Lombardo, Giovanni, 2013. "Global implications of national unconventional policies," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 66-85.
  5. Kang, Hyunju, 2013. "Behind the scenes of abandoning a fixed exchange rate regime," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3145-3156.

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