Cross-country Spillovers in Interbank Liquidity Crises

Rajesh Singh and Mohammad Hasan

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Financially integrated economies observe a cross-country credit boom prior to financial recessions and a bust afterwards. This paper presents a two-country real business cycle model with banking sector where privately known intermediation efficiency of banks make them heterogeneous and gives rise to an interbank market. Overaccumulation of assets or low productivity in one country may lead to credit freeze in both financially integrated countries due to the existence of moral hazard and asymmetric information in the interbank market. A “sail together” financial integration may go into a “sink together” interbank credit freeze.

Date: 2023-11-01
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genstf:202311011603320000

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