Working Paper

Banking globalization and international business cycles

Abstract: This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking crossborder borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business-cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis.

JEL Classification: E52; F41; E32; E44; E22;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2010

Number: 58

Pages: 78 pages

Note: Published as: Ueda, Kozo (2012), "Banking Globalization and International Business Cycles: Cross-border Chained Credit Contracts and Financial Accelerators," Journal of International Economics 86 (1): 1-16.