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Financial Markets and Financial Leverage in a Two-Country World Economy

In: Banking Market Structure and Monetary Policy

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  • Simon Gilchrist

    (Boston University)

Abstract

In this paper, we consider the role of financial market imperfections in a simplified version of a twocountry model. We model cross-country financial heterogeneity through differences in leverage. We show that high leverage economies are particularly vulnerable to slow-downs in the world economy. The degree to which leverage magnifies shocks to the world economy depends on the nature of the disturbance. In the presence of the financial accelerator, supply shocks that are capital specific are likely to be less destabilizing than supply shocks that are disembodied.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Simon Gilchrist, 2004. "Financial Markets and Financial Leverage in a Two-Country World Economy," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 2, pages 027-058, Central Bank of Chile.
    • Handle: RePEc:chb:bcchsb:v07c02pp027-058
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    References listed on IDEAS

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    1. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, April.
    2. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 295-330, March.
    3. Simon Gilchrist & Jean-Olivier Hairault & Hubert Kempf, 2002. "Monetary policy and the financial accelerator in a monetary union," International Finance Discussion Papers 750, Board of Governors of the Federal Reserve System (U.S.).
    4. Faia, Ester, 2002. "Monetary policy in a world with different financial systems," Working Paper Series 183, European Central Bank.
    5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nicoletta Batini & Paul Levine, 2008. "Monetary and Fiscal Rules in an Emerging Small Open Economy," CDMA Conference Paper Series 0810, Centre for Dynamic Macroeconomic Analysis.
    2. Batini, Nicoletta & Gabriel, Vasco & Levine, Paul, 2010. "A Floating versus managed exchange rate regime in a DSGE model of India," Working Papers 10/70, National Institute of Public Finance and Policy.
    3. Jeroen Rozendaal & Yannick Malevergne & Didier Sornette, 2015. "Macroeconomic Dynamics of Assets, Leverage and Trust," Papers 1512.03618, arXiv.org.
    4. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 71-105, September.
    5. Pesaran, M. H. & Xu, T., 2011. "Business Cycle Effects of Credit and Technology Shocks in a DSGE Model with Firm Defaults," Cambridge Working Papers in Economics 1159, Faculty of Economics, University of Cambridge.
    6. Agénor, Pierre-Richard & Jackson, Timothy & Jia, Pengfei, 2021. "Macroprudential policy coordination in a currency union," European Economic Review, Elsevier, vol. 137(C).
    7. Xu, T.T., 2012. "The role of credit in international business cycles," Cambridge Working Papers in Economics 1202, Faculty of Economics, University of Cambridge.
    8. Luca Guerrieri & Matteo Iacoviello & Raoul Minetti, 2013. "Banks, Sovereign Debt, and the International Transmission of Business Cycles," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 181-213.
    9. Olivero, María Pía, 2010. "Market power in banking, countercyclical margins and the international transmission of business cycles," Journal of International Economics, Elsevier, vol. 80(2), pages 292-301, March.
    10. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
    11. Kopoin, Alexandre, 2015. "Cross-border Banking, Spillover Effects and International Business Cycles," MPRA Paper 65515, University Library of Munich, Germany, revised 06 Apr 2015.
    12. Paul Levine, 2012. "Monetary policy in an uncertain world: probability models and the design of robust monetary rules," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 5(1), pages 70-88, April.
    13. Javier Gómez Pineda, 2004. "A Framework for Macroeconomic Stability in Emerging Market Economies," Borradores de Economia 320, Banco de la Republica de Colombia.
    14. Murat Kizildag & Ozgur Ozdemir, 2017. "Underlying factors of ups and downs in financial leverage overtime," Tourism Economics, , vol. 23(6), pages 1321-1342, September.
    15. Junhee Lee & Wooheon Rhee, 2013. "Financial Factors in the Business Cycle of a Small Open Economy: The Case of Korea," Open Economies Review, Springer, vol. 24(5), pages 881-900, November.
    16. Nikhil Patel, 2021. "International Trade Finance and the Cost Channel of Monetary Policy in Open Economies," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-62, October.
    17. Levine, Paul & Pearlman, Joseph, 2011. "Monetary and Fiscal Policy in a DSGE Model of India," Working Papers 11/96, National Institute of Public Finance and Policy.
    18. Rodrigo Caputo & Juan Pablo Medina & Claudio Soto, 2011. "The Financial Accelerator under Learning and the Role of Monetary Policy," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 7, pages 185-218, Central Bank of Chile.
    19. Percic Stanislav & Apostoaie Constantin-Marius & Chirlesan Dan, 2013. "A Tale Of Two Cycles In Developing And Advanced Economies: A Country Case Study Comparison," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 440-450, December.
    20. Vasco J. Gabriel & Paul Levine & Joseph Pearlman & Bo Yang, 2010. "An Estimated DSGE Model of the Indian Economy," NIPE Working Papers 29/2010, NIPE - Universidade do Minho.
    21. Gülçin Özkan & Ms. Filiz D Unsal, 2012. "Global Financial Crisis, Financial Contagion, and Emerging Markets," IMF Working Papers 2012/293, International Monetary Fund.
    22. M. Hashem Pesaran & TengTeng Xu, 2013. "Business Cycle Effects of Credit Shocks in a DSGE Model with Firm Defaults," Staff Working Papers 13-19, Bank of Canada.

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