International Credit Markets and Global Business Cycles

Patrick Pintus, Yi Wen and Xiaochuan Xing
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Xiaochuan Xing: Yale University [New Haven]

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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, GDP, 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 in both 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.

Keywords: world interest rate; international co-movement; self-fulfilling equilibria (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-dge, nep-ifn and nep-opm
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01797029v2
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: International credit markets and global business cycles (2019)
Working Paper: International credit markets and global business cycles (2019)
Working Paper: International Credit Markets and Global Business Cycles (2018)
Working Paper: International Credit Markets and Global Business Cycles (2018)
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