Domestic and Foreign Lenders and International Business Cycles

Matteo Iacoviello () and Raoul Minetti

No 554, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We examine the international transmission of business cycles in a two-country economy in which credit contracts are imperfectly enforceable. In our economy, foreign lenders differ from domestic lenders in their ability to recover value from borrowers' assets and, therefore, to protect themselves against contractual non-enforceability. The relative importance of domestic and foreign credit frictions changes over the cycle. This induces entrepreneurs to adjust their debt exposure and allocation of collateral between domestic and foreign lenders in response to exogenous productivity shocks. We show that such a model can explain positive output correlations across countries. The model also appears consistent with econometric evidence on asset values and domestic and foreign debt exposure.

Keywords: Domestic and foreign loans; international business cycles; collateral (search for similar items in EconPapers)
JEL-codes: E44 F34 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-dge, nep-mac and nep-pke
Date: 2003-01-31, Revised 2003-12-05
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:554

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