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Productive Misallocation and International Transmission of Credit Shocks

Author

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  • Yuko Imura
  • Julia Thomas

Abstract

We develop an asymmetric, two-country equilibrium business cycle model to study the role of international trade in transmitting the real effects of financial shocks across borders. Our heterogeneous firms have differing needs for external finance and face occasionally binding collateral constraints that hinder their investments, while input-output linkages facilitate trade in both final goods and intermediate inputs. When confronted with global financial shocks, our model predicts that a recession in a large economy calibrated to the U.S. considerably alters a recession in its smaller trade partner calibrated to Canada, with distinct investment dynamics driving the transmission. The reverse does not hold.

Suggested Citation

  • Yuko Imura & Julia Thomas, 2015. "Productive Misallocation and International Transmission of Credit Shocks," Staff Working Papers 15-19, Bank of Canada.
    • Handle: RePEc:bca:bocawp:15-19
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    References listed on IDEAS

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    Cited by:

    1. Ohdoi, Ryoji, 2018. "International transmission of financial shocks without financial integration," Economics Letters, Elsevier, vol. 170(C), pages 46-49.

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    More about this item

    Keywords

    Business fluctuations and cycles; Economic models; Financial markets; Financial stability; International topics;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F - International Economics
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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