Agency Costs, Risk Shocks and International Cycles
Marc-André Letendre and
Joel Wagner ()
Staff Working Papers from Bank of Canada
We add agency costs as in Carlstrom and Fuerst (1997) into a two-country, two-good international business-cycle model. In our model, changes in the relative price of investment arise endogenously. Despite the fact that technology shocks are uncorrelated across countries, the relative price of investment is positively correlated across countries in our model, much as it is in detrended U.S./euro area data. We also find that the financial frictions tend to increase the volatility of the terms of trade and the international correlations of consumption, hours worked, output and investment. We then compare this model to an alternative model that also includes risk shocks à la Christiano, Motto and Rostango (2014). We use credit spread data (for the United States) to calibrate the AR(1) process for risk shocks. We find that risk shocks are too small to significantly impact the model’s dynamics.
Keywords: Business fluctuations and cycles; International topics (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 F44 (search for similar items in EconPapers)
Pages: 48 pages
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Journal Article: AGENCY COSTS, RISK SHOCKS, AND INTERNATIONAL CYCLES (2018)
Working Paper: Agnecy Costs, Risk Shocks and International Cycles (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:16-2
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