Cross-border Banking, Spillover Effects and International Business Cycles

Kopoin, Alexandre (2015): Cross-border Banking, Spillover Effects and International Business Cycles.

Abstract

This paper studies the link between cross-border banking activities and the international propagation of real and financial shocks. We develop a two-country DSGE model with a bank capital channel and a financial accelerator, in which banks grant loans to domestic as well as to foreign firms. The model economy is calibrated to data from the U.S. and Canada. Our results suggest that following a positive technology shock and a tightening of home monetary policy, the existence of cross-border banking activities tends to amplify the transmission channel in both the domestic and the foreign country. However, cross-border banking activities tend to weaken the impact of shocks on foreign and home consumption because of the cross-border saving possibility between the two countries. Finally, our simulations suggest that under cross-border banking, correlations between macroeconomic variables of both countries become greater than in the absence of international banking activities. Overall, our results show sizable spillover effects of cross-border banking on macroeconomic dynamics and suggest cross border banking is an important source of the synchronization of business cycles between the U.S. and Canada.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cross-border banking; bank capital, interest rate and exchange rate channels; business cycle synchronization.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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