Faculty of Economics and Business Administration Publications Database

Finance and International Business Cycles

Volume: 54
Number: 4
Pages: 1018 - 1034
Month: May
ISSN-Print: 0304-3932
Link External Source: Online Version
Year: 2007
Keywords: Financial distance; Differential transmission mechanism; International business cycle
Abstract: Business cycles are more correlated among countries that have similar financial structures. We first document this empirical regularity using OECD data, and then build a two-country DSGE model with financial frictions that replicates it. Alternative monetary policy regimes and parameter values are explored. Output co-movements increase when the countries involved are linked by a credible exchange rate peg and when they open up to trade; they decrease when their financial openness increases. The model also accounts for a number of stylized facts of international business cycles, such as the positive international correlation of output, investment and employment.