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Domestic and Foreign Lenders and International Business Cycles

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Author Info
Matteo Iacoviello () (Boston College)
Raoul Minetti () (Michigan State University)

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Abstract

We 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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Publisher Info
Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 554.

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Length: 29 pages
Date of creation: 31 Jan 2003
Date of revision: 05 Dec 2003
Handle: RePEc:boc:bocoec:554

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Related research
Keywords: 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

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    Other versions:
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    Other versions:
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  11. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August. [Downloadable!] (restricted)
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