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International Business Cycle and Financial Intermediation

Author

Listed:
  • Tamas Csabafi

    () (Office No. C58, Cardiff Business School, Colum Drive, Cardiff, CF10 3EU, UK)

  • Max Gillman

    () (Office N. 408 SSB, 1 University Boulevard, St. Louis, Missouri 63121, USA)

  • Ruthira Naraidoo

    () (Faculty of Economics and Management Sciences, Department of Economics, University of Pretoria, South Africa)

Abstract

The world-wide financial crisis of 2007 to 2009 caused bankruptcy and bank failures in the US and many other parts such as Europe. Recent empirical evidence suggests that this simultaneous drop in output was strongest in countries with greater financial ties to the US economy with important cross border deposit and lending. This paper develops a two-country framework to allow for banking structures within an international real business cycle model. The banking structure across countries is modelled using the production approach to financial intermediation. We allow both countries. banks to be able to take deposits both locally and internationally. We analyze the transmission mechanism of both goods and banking sector productivity shocks. We show that goods total factor productivity (TFP) and bank TFP have different effects on the finance premium. Most countries have shown procyclic equity premium over their histories but with evidence that these are countercyclic during the Great Recession especially. The model has the ability to explain the countercyclical movements of credit spreads during major recession and financial crisis when goods TFP also affects banking productivity. This we model as a cross correlation of shocks to replicate the recent events during the crisis period. Importantly, the model can also explain business cycles facts and the countercyclical behaviour of the trade balance.

Suggested Citation

  • Tamas Csabafi & Max Gillman & Ruthira Naraidoo, 2016. "International Business Cycle and Financial Intermediation," Working Papers 201687, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201687
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    References listed on IDEAS

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    1. International Business Cycle and Financial Intermediation
      by Christian Zimmermann in NEP-DGE blog on 2017-01-17 22:06:21

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    Cited by:

    1. Cavallaro, Eleonora & Villani, Ilaria, 2021. "Real income convergence and the patterns of financial integration in the EU," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    : International Business Cycles; Financial Intermediation; Credit Spread;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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