A Neoclassical Model of the World Financial Cycle

Yan Bai, Patrick Kehoe, Pierlauro Lopez and Fabrizio Perri

No 33441, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads’ fluctuations. Over the whole 1994-2024 period, however, Northern shocks account for less than 20% of these fluctuations.

JEL-codes: F34 F41 F44 (search for similar items in EconPapers)
Date: 2025-02
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ifn and nep-opm
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Working Paper: A Neoclassical Model of the World Financial Cycle (2025)
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