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Productive Misallocation and International Transmission of Credit Shocks

Yuko Imura and Julia Thomas

Staff Working Papers from Bank of Canada

Abstract: We develop an asymmetric, two-country equilibrium business cycle model to study the role of international trade in transmitting the real effects of financial shocks across borders. Our heterogeneous firms have differing needs for external finance and face occasionally binding collateral constraints that hinder their investments, while input-output linkages facilitate trade in both final goods and intermediate inputs. When confronted with global financial shocks, our model predicts that a recession in a large economy calibrated to the U.S. considerably alters a recession in its smaller trade partner calibrated to Canada, with distinct investment dynamics driving the transmission. The reverse does not hold.

Keywords: Business fluctuations and cycles; Economic models; Financial markets; Financial stability; International topics (search for similar items in EconPapers)
JEL-codes: E E2 E22 E3 E32 E4 E44 F F4 F41 F44 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-ifn, nep-mac and nep-opm
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Citations: View citations in EconPapers (1)

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