International Transmission of Shocks under Financial Frictions: Some Implications for International Business Cycle Comovement

Beatriz de Blas ()

No 2008/01, Working Papers in Economic Theory from Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History)

Abstract: This paper analyzes the international transmission of shocks in economies with financial frictions. In a two-country flexible price monetary model with distribution costs in the imported good I study the transmission of shocks to productivity, money supply, government spending and to entrepreneurs' net worth. Financial frictions amplify the effects of shocks both at the domestic and at the international level. In the model, international business cycle comovement, measured as cross-country output correlations, is increasing in the degree of openness and distribution costs, and as in previous literature, decreasing in the degree of financial frictions. Finally, fiscal shocks play an important role in international business cycle comovement in the presence of financial frictions. First, because the crowding out effect is stronger on private consumption and weaker on investment if there are financial frictions, and second, because fiscal shocks may reduce the cross-country correlation of output.

Keywords: international business cycles; distribution costs; financial frictions; flexible prices (search for similar items in EconPapers)
JEL-codes: E32 E44 F41 F42 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2008-02
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-mac and nep-opm
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