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Financial integration and business cycles in a small open economy

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  • Cakici, S. Meral

Abstract

The purpose of this study is to examine a dynamic, stochastic, general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy. The existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy. Moreover, there is uncertainty involved in the production process which leads to collateralized borrowing by firms and, therefore, has to be taken into account in the design of the loan contracts between firms and financial intermediaries. It is shown that increasing financial integration amplifies the effect of a positive, temporary monetary shock on output, consumption, investment, labor demand and loans; whereas it has barely any implication for the impact of a positive, temporary technology shock on the economy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 7 ()
Pages: 1280-1302

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:7:p:1280-1302

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Financial integration; Dynamic stochastic general equilibrium; Aggregate fluctuations; Propagation;

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Cited by:
  1. S. Meral Cakici, 2011. "Default Risk Premium and Aggregate Fluctuations in a Small Open Economy," Koç University-TUSIAD Economic Research Forum Working Papers 1131, Koc University-TUSIAD Economic Research Forum.
  2. Bhattacharya, Rudrani & Patnaik, Ila & Pundit, Madhavi, 2013. "Emerging economy business cycles: Financial integration and terms of trade shocks," Working Papers 13/120, National Institute of Public Finance and Policy.

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