 International credit markets and global business cyclesPatrick Pintus, Yi Wen and Xiaochuan Xing International Journal of Economic Theory, 2019, vol. 15, issue 1, 53-75 Abstract: This paper stresses a new channel through which global financial linkages contribute to the co‐movement in economic activity across countries. We show in a two‐country setting with borrowing constraints that international credit markets are subject to self‐fulfilling variations in the world real interest rate. Those expectation‐driven changes in the borrowing cost in turn act as global shocks that induce strong cross‐country co‐movements in both financial and real variables (such as asset prices, gross domestic product, consumption, investment, and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom both at home and abroad. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business‐cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor's intimate link to global financial markets. Date: 2019 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:ijethy:v:15:y:2019:i:1:p:53-75 Ordering information: This journal article can be ordered from Access Statistics for this article International Journal of Economic Theory is currently edited by Kazuo Nishimura and Makoto Yano More articles in International Journal of Economic Theory from The International Society for Economic Theory |
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