Financial market globalization, nonconvergence and credit cycles

Wai-Hong Ho ()

Annals of Finance, 2017, vol. 13, issue 2, No 2, 153-180

Abstract: Abstract This paper explores the dynamic consequences of variable investment-project size in a global economy consisting of many small open countries that are plagued with domestic credit market frictions. As is customary in the literature, borrowers provide some internal funds, but they also need external funds to implement their investment projects, which are subject to the costly-state-verification problem. Contrary to the literature, the investment-project size increases with the country’s own capital stock. We find that financial market globalization may lead to a process of oscillatory convergence, even in the absence of any exogenous shocks, if the investment-project size is very sensitive to the change in capital stock.

Keywords: Costly-state-verification; Credit market imperfection; Cycles; Symmetry-breaking (search for similar items in EconPapers)
JEL-codes: E44 F63 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10436-017-0293-0

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