Finance and international business cycles |
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Authors: | Ester Faia |
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Institution: | Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, Barcelona 08005, Spain |
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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. |
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Keywords: | E3 E42 E44 E52 F41 |
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