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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. Federico Mandelman & Pau Rabanal & Juan Francisco Rubio-Ramirez & Diego Vilan, 2011. "Investment Specific Technology Shocks and International Business Cycles: An Empirical Assessment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 136-155, January.
    2. 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.
    3. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    4. Ohanian, Lee E. & Raffo, Andrea, 2012. "Aggregate hours worked in OECD countries: New measurement and implications for business cycles," Journal of Monetary Economics, Elsevier, vol. 59(1), pages 40-56.
    5. Ueda, Kozo, 2012. "Banking globalization and international business cycles: Cross-border chained credit contracts and financial accelerators," Journal of International Economics, Elsevier, vol. 86(1), pages 1-16.
    6. Ambler, Steve & Cardia, Emanuela & Zimmermann, Christian, 2002. "International transmission of the business cycle in a multi-sector model," European Economic Review, Elsevier, vol. 46(2), pages 273-300, February.
    7. Bengui, Julien & Mendoza, Enrique G. & Quadrini, Vincenzo, 2013. "Capital mobility and international sharing of cyclical risk," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 42-62.
    8. Kollmann, Robert, 1996. "Incomplete asset markets and the cross-country consumption correlation puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 20(5), pages 945-961, May.
    9. Doireann Fitzgerald, 2012. "Trade Costs, Asset Market Frictions, and Risk Sharing," American Economic Review, American Economic Association, vol. 102(6), pages 2700-2733, October.
    10. Loukas Karabarbounis, 2012. "Home Production, Labor Wedges, and International Real Business Cycles," NBER Working Papers 18366, National Bureau of Economic Research, Inc.
    11. Beaudry, Paul & Guay, Alain, 1996. "What do interest rates reveal about the functioning of real business cycle models?," Journal of Economic Dynamics and Control, Elsevier, vol. 20(9-10), pages 1661-1682.
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    Cited by:

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

    More about this item

    Keywords

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

    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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