Date Added: Dec 2010
This paper analyses the role of banks in a small scale flexible price two-country DSGE model. The presence of banks is shown not to alter the standard trans-mission mechanism by which shocks are transmitted across borders. Banks can have significant effects on the business cycle characteristics of the model when they are an independent source of shocks. A contractionary banking sector shock leads to a depreciation of the terms of trade and an improvement in net trade.