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

A two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifical...

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Bibliographic Details
Published in:Review of international economics 2018-05, Vol.26 (2), p.279-301
Main Author: Rouillard, Jean‐François
Format: Article
Language:English
Subjects:
Business cycles
Capital
Economic models
Endogenous
Foreign companies
Interest rates
International business
Technology
Terms of trade
Working capital
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Summary:A two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.
ISSN:0965-7576
1467-9396
DOI:10.1111/roie.12326