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Aggregate volatility and international dynamics. The role of credit supply

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  • Gete, Pedro
  • Melkadze, Givi

Abstract

Changes in country-specific aggregate volatility are positively correlated with the current account but negatively correlated with investment, output and credit flows. An International Real Business Cycle model with time-varying aggregate uncertainty, through a precautionary savings channel, can account for the positive correlation but implies counterfactual comovements for the other variables. Adding a credit supply channel with default and lenders exposed to aggregate risk allows the model to match all the facts. Higher volatility contracts credit supply and lowers investment and output. The current account turns to a surplus because savings increase, but also because investment collapses.

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  • Gete, Pedro & Melkadze, Givi, 2018. "Aggregate volatility and international dynamics. The role of credit supply," Journal of International Economics, Elsevier, vol. 111(C), pages 143-158.
    • Handle: RePEc:eee:inecon:v:111:y:2018:i:c:p:143-158
    DOI: 10.1016/j.jinteco.2018.01.002
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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