International Business Cycle and Financial Intermediation

Tamas Csabafi, Max Gillman and Ruthira Naraidoo

No 201687, Working Papers from University of Pretoria, Department of Economics

Abstract: The world-wide financial crisis of 2007 to 2009 caused bankruptcy and bank failures in the US and many other parts such as Europe. Recent empirical evidence suggests that this simultaneous drop in output was strongest in countries with greater financial ties to the US economy with important cross border deposit and lending. This paper develops a two-country framework to allow for banking structures within an international real business cycle model. The banking structure across countries is modelled using the production approach to financial intermediation. We allow both countries. banks to be able to take deposits both locally and internationally. We analyze the transmission mechanism of both goods and banking sector productivity shocks. We show that goods total factor productivity (TFP) and bank TFP have different effects on the finance premium. Most countries have shown procyclic equity premium over their histories but with evidence that these are countercyclic during the Great Recession especially. The model has the ability to explain the countercyclical movements of credit spreads during major recession and financial crisis when goods TFP also affects banking productivity. This we model as a cross correlation of shocks to replicate the recent events during the crisis period. Importantly, the model can also explain business cycles facts and the countercyclical behaviour of the trade balance.

Keywords: : International Business Cycles; Financial Intermediation; Credit Spread (search for similar items in EconPapers)
JEL-codes: E13 E32 E44 F41 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2016-12
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.up.ac.za/media/shared/61/WP/wp_2016_87.zp105880.pdf (application/pdf)

Related works:
Journal Article: International Business Cycle and Financial Intermediation (2019)
Working Paper: International Business Cycle and Financial Intermediation (2018)
Working Paper: International Business Cycle and Financial Intermediation (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201687

Access Statistics for this paper

More papers in Working Papers from University of Pretoria, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Rangan Gupta ().