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Financial frictions, interest rate dynamics, and international business cycle synchronization

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  • Jean‐François Rouillard

Abstract

A two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.

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  • Jean‐François Rouillard, 2018. "Financial frictions, interest rate dynamics, and international business cycle synchronization," Review of International Economics, Wiley Blackwell, vol. 26(2), pages 279-301, May.
    • Handle: RePEc:bla:reviec:v:26:y:2018:i:2:p:279-301
    DOI: 10.1111/roie.12326
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    Cited by:

    1. Daitri Tiwary & Samit Paul, 2023. "Role of Bank Credit and External Commercial Borrowings in Working Capital Financing: Evidence from Indian Manufacturing Firms," JRFM, MDPI, vol. 16(11), pages 1-19, October.
    2. Rouillard, Jean-François, 2018. "International risk sharing and financial shocks," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 26-44.

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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