Financial frictions, interest rate dynamics, and international business cycle synchronization

Jean-François Rouillard

Cahiers de recherche from Departement d'économique de l'École de gestion à l'Université de Sherbrooke

Abstract: A two-country real business cycle model with national endogenous borrowing constraints and frictionless international financial markets can account for the high level of international co-movements. The borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, which plays a key role in the international transmission of technology shocks. Moreover, terms of trade are amplified by the effects of these shocks on real interest rates which ultimately lead to greater synchronization of economic activities across countries. Finally, the signs of international co-movements are not sensitive to the structure of international asset markets (incomplete markets or financial autarky). Therefore, in the presence of national financial frictions, international efficiency cannot be assessed from looking at the behavior of aggregate variables.

Keywords: borrowing constraints; working capital; international co-movements; terms of trade. (search for similar items in EconPapers)
JEL-codes: E44 F34 F44 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2015-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://gredi.recherche.usherbrooke.ca/wpapers/GREDI-1512.pdf First version, 2015 (application/pdf)
https://onlinelibrary.wiley.com/doi/epdf/10.1111/roie.12326 Published version, 2018 (application/pdf)
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Journal Article: Financial frictions, interest rate dynamics, and international business cycle synchronization (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:shr:wpaper:15-12

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