International Credit Markets and Global Business Cycles

Patrick A. Pintus (1, 2) , Yi Wen (3) , Xiaochuan Xing (4)

1 INSHS-CNRS - Institut des Sciences Humaines et Sociales - CNRS Sciences humaines et sociales
2 AMSE - Aix-Marseille Sciences Economiques
3 Federal Reserve Bank of St. Louis & Tsinghua University
4 Yale University [New Haven]

This paper stresses a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom in both home and abroad. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business-cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor’s intimate link to global financial markets.

Mots clés: world interest rate; international co-movement; self-fulfilling equilibria

Domaines: Economies et finances

Patrick A. Pintus, Yi Wen, Xiaochuan Xing. International Credit Markets and Global Business Cycles. 2018. ⟨halshs-01797029v2⟩