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 codes: E22, E32, E44, E52, F41

Government Policy, Credit Markets, and Economic Activity*

“…The latter model resembles BGG closely, although we follow Nowobilski (2011) by assuming that the …nancial 5 There is now a large literature devoted to constructing quantitative dynamic, stochastic general equilibrium models for evaluating the consequences of government asset purchase policies. For a partial list of this work, see Ajello (2010), Bernanke, Gertler and Gilchrist (1999), Carlstrom and Fuerst (1997), Christiano, Motto and Rostagno, (2003, Curdia and Woodford (2009), Del Negro, Eggertsson, Ferrero and Kiyotaki, (2010), Dib (2010), Fisher (1999), Gertler and Karadi (2009), Gertler and Kiyotaki (2011), Hirakata, Sudo and Ueda (2009aUeda ( ,2009bUeda ( ,2010), Liu, Wang and Zha (2010), Meh and Moran (2010), Nowobilski (2011), Ueda (2009), Zeng (2011). 6 The Moore and Kiyotaki and Moore ideas are pursued quantitatively in Ajello (2010), and Del Negro, Eggertsson, Ferrero and Kiyotaki (2010).…”

“…In addition, the bank is perfectly diversi…ed across …rms so that in BGG, banks are perfectly safe. Other modi…cations of the BGG model that introduce risk in banking include for example, Hirakata, Sudo and Ueda (2009aUeda ( ,2009bUeda ( ,2010, Nowobilski (2011), Ueda (2009), and Zeng (2011). 16 To our knowledge, the …rst papers to consider the economic e¤ects of variations in microeconomic uncertainty are Williamson (1987) and Christiano, Motto and Rostagno (2003).…”

“…Solving (C.7) for and multiplying the numerator and denominator of (C.8) by   ( + )  0 () we obtain: 52 To see that 0 suppose on the contrary that  0 Note that ¬(0) = (0) = 0 so that the solution to the Lagrangian representation of the problem solved by the loan contract is  = 1 and  = 0 This does not solve the problem of maximizing (C.5) subject to (C.6) because (C.6) is violated.…”

Cross-Border Credit Intermediation and Domestic Liquidity Provision in a Small Open Economy

“…In some ways, the financial accelerator approach extends naturally to financial institutions, which face constraints on their ability to obtain funds, however, there are important differences in the composition of their balance sheet which need to be taken into account, for instance, their greater reliance on leverage. Hirakata et al (2009Hirakata et al ( , 2011Hirakata et al ( , 2013Hirakata et al ( , 2016, and Ueda (2012) expand the framework in Bernanke et al (1999) by introducing credit constrained financial institutions, in addition to credit constrained entrepreneurs. Hence, their framework applies the costly state verification structure to two stages in credit intermediation and can account for a wider variety of macrofinancial linkages than the traditional models.…”

Government Policy, Credit Markets and Economic Activity

“…In addition, the bank is perfectly diversi…ed across …rms so that in BGG, banks are perfectly safe. Other modi…cations of the BGG model that introduce risk in banking include for example, Hirakata, Sudo and Ueda (2009aUeda ( ,2009bUeda ( ,2010, Nowobilski (2011), Ueda (2009), and Zeng (2011). 16 To our knowledge, the …rst papers to consider the economic e¤ects of variations in microeconomic uncertainty are Williamson (1987) …”