Banking Globalization and International Business Cycles
This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking cross-border borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis.
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- International Monetary Fund, 2000. "Spillovers Through Banking Centers; A Panel Data Analysis," IMF Working Papers 00/88, International Monetary Fund.
- Skander Van den Heuvel, 2005.
"The Welfare Cost of Bank Capital Requirements,"
2005 Meeting Papers
880, Society for Economic Dynamics.
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