International Transmission of Financial Shocks without Financial Integration

Ohdoi, Ryoji (2018): International Transmission of Financial Shocks without Financial Integration.

Abstract

This study analyzes how financial shocks in one country transmit to another country through international trade. To this end, it develops a dynamic general equilibrium model of two-country Ricardian trade with a continuum of goods. Financial frictions exist in each country and the two countries can be asymmetric in terms of the degree of frictions, which can be a novel source of comparative advantage. In the case of a permanent credit crunch, we can analytically show that such a shock reduces the long-run investment, GDP, wage income, and aggregate income of heterogeneous entrepreneurs in both countries. We also numerically investigate the transitory responses to a temporal credit shock and show that such an internationally synchronized economic downturn is also observed during transition periods.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Frictions, Dynamic Ricardian Trade with a Continuum of Goods, Heterogeneous Agents, Asymmetric Countries, Credit Crunch
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F44 - International Business Cycles

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