Financial Intermediation And The International Business Cycle

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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.