Domestic and Foreign Lenders and International Business Cycles
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.
|Date of creation:||31 Jan 2003|
|Date of revision:||05 Dec 2003|
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