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International Credit Markets and Global Business Cycles

Author

Listed:
  • Patrick A. Pintus
  • Yi Wen
  • Xiaochuan Xing
Abstract
This paper stresses a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment). When firms around the world benefit from unexpectedly low debt repayments today, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom in both home and foreign economies. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of world business-cycle factor documented by recent empirical studies through dynamic factor analysis and such a factor?s intimate link to global financial markets.

Suggested Citation

  • Patrick A. Pintus & Yi Wen & Xiaochuan Xing, 2018. "International Credit Markets and Global Business Cycles," Working Papers 2018-9, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2018-009
    DOI: 10.20955/wp.2018.009
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    Cited by:

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    3. Been-Lon Chen & Yunfang Hu & Kazuo Mino, 2020. "Capital Allocation and Wealth Distribution in a Global Economy with Financial Frictions," KIER Working Papers 1045, Kyoto University, Institute of Economic Research.

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    More about this item

    Keywords

    World Interest Rate; international comovement; Self-Fulfilling Equilibria;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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