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The role of credit in international business cycles

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  • Xu, T.T.

Abstract

The recent financial crisis raises important issues about the role of credit in international business cycles and the transmission of financial shocks across country borders. This paper investigates the international spillover of US credit shocks and the importance of credit in explaining business cycle fluctuations using a global vector autoregressive (GVAR) model with credit, estimated over the period 1979Q2 to 2006Q4 for 26 major advanced and emerging economies. Results from the country-specific models reveal the importance of bank credit in explaining output growth, changes in inflation and long term interest rates in countries with developed banking sector. The generalized impulse response function (GIRF) for a one standard error negative shock to US real credit provides strong evidence of the spillover of US credit shock to the UK, the Euro area, Japan and other industrialized economies.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1202.

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Date of creation: 05 Jan 2012
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Handle: RePEc:cam:camdae:1202

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Cited by:
  1. Cesa-Bianchi, Ambrogio & Pesaran, M. Hashem & Rebucci, Alessandro & Xu, TengTeng, 2011. "China's Emergence in the World Economy and Business Cycles in Latin America," IZA Discussion Papers 5889, Institute for the Study of Labor (IZA).
  2. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5329-5345.

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