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Aggregate volatility and international dynamics. The role of credit supply

Pedro Gete and Givi Melkadze

Journal of International Economics, 2018, vol. 111, issue C, 143-158

Abstract: Changes in country-specific aggregate volatility are positively correlated with the current account but negatively correlated with investment, output and credit flows. An International Real Business Cycle model with time-varying aggregate uncertainty, through a precautionary savings channel, can account for the positive correlation but implies counterfactual comovements for the other variables. Adding a credit supply channel with default and lenders exposed to aggregate risk allows the model to match all the facts. Higher volatility contracts credit supply and lowers investment and output. The current account turns to a surplus because savings increase, but also because investment collapses.

Keywords: Credit supply; Current account; Uncertainty; Trade balance; Precautionary savings (search for similar items in EconPapers)
JEL-codes: D81 F32 G21 (search for similar items in EconPapers)
Date: 2018
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