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Financial frictions, financial integration and the international propagation of shocks

Listed author(s):
  • Luca Dedola
  • Giovanni Lombardo

The recent Great Recession was particularly remarkable not only for its unprecedented severity, but also for the exceptional degree of global interdependence in financial and real variables. This article argues that under financial integration, leveraged investors face the same returns across internationally traded assets. This would tend to equalise their borrowing cost across countries. Model simulations show that an unexpected increase in credit spreads in one country generates a similar increase in credit spreads in other financially integrated countries, bringing about a global contraction. JEL Classification: G0

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File URL: http://hdl.handle.net/10.1111/j.1468-0327.2012.00286.x
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Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 27 (2012)
Issue (Month): 70 (04)
Pages: 319-359

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Handle: RePEc:bla:ecpoli:v:27:y:2012:i:70:p:319-359
DOI: j.1468-0327.2012.00286.x
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