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Financial frictions, interest rate dynamics, and international business cycle synchronization

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  • Jean-François Rouillard

    (GREDI, Universite de Sherbrooke)

Abstract

A two-country real business cycle model with national endogenous borrowing constraints and frictionless international financial markets can account for the high level of international co-movements. The borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, which plays a key role in the international transmission of technology shocks. Moreover, terms of trade are amplified by the effects of these shocks on real interest rates which ultimately lead to greater synchronization of economic activities across countries. Finally, the signs of international co-movements are not sensitive to the structure of international asset markets (incomplete markets or financial autarky). Therefore, in the presence of national financial frictions, international efficiency cannot be assessed from looking at the behavior of aggregate variables.

Suggested Citation

  • Jean-François Rouillard, 2015. "Financial frictions, interest rate dynamics, and international business cycle synchronization," Cahiers de recherche 15-12, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
  • Handle: RePEc:shr:wpaper:15-12
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    File URL: http://gredi.recherche.usherbrooke.ca/wpapers/GREDI-1512.pdf
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    File URL: https://onlinelibrary.wiley.com/doi/epdf/10.1111/roie.12326
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    References listed on IDEAS

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    1. Rouillard, Jean-François, 2018. "International risk sharing and financial shocks," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 26-44.

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    More about this item

    Keywords

    borrowing constraints; working capital; international co-movements; terms of trade.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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