Financial Frictions and the International Transmission of Shocks
Seoul Journal of Economics, 2019, Vol. 32, No. 4
36 Pages Posted: 16 Dec 2019
Date Written: November 30, 2019
This study presents a two-good, two-country model with financial frictions, where banks facing a borrowing constraint intermediate funds between households and firms. The endogenous fluctuations of international relative prices increase the business cycle co-movement across countries when combined with habit formation in consumption and investment adjustment costs. Financial frictions due to the borrowing constraint of the banks further amplify the effects of productivity and capital quality shocks within a country and across the two countries.
Keywords: Financial friction, International transmission of shock, Business cycle co-movement
JEL Classification: E32, F41, F44, G15, G20
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