Domestic and Foreign Lenders and International Business Cycles
AbstractWe examine the international transmission of business cycles in a two-country economy in which credit contracts are imperfectly enforceable. In our economy, foreign lenders differ from domestic lenders in their ability to recover value from borrowers' assets and, therefore, to protect themselves against contractual non-enforceability. The relative importance of domestic and foreign credit frictions changes over the cycle. This induces entrepreneurs to adjust their debt exposure and allocation of collateral between domestic and foreign lenders in response to exogenous productivity shocks. We show that such a model can explain positive output correlations across countries. The model also appears consistent with econometric evidence on asset values and domestic and foreign debt exposure.
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Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 554.
Length: 29 pages
Date of creation: 31 Jan 2003
Date of revision: 05 Dec 2003
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Web page: http://fmwww.bc.edu/EC/
More information through EDIRC
Domestic and foreign loans; international business cycles; collateral;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-02-10 (All new papers)
- NEP-DGE-2003-02-10 (Dynamic General Equilibrium)
- NEP-MAC-2003-02-10 (Macroeconomics)
- NEP-PKE-2003-02-10 (Post Keynesian Economics)
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