International Credit Constraints, Trade And Financial Markets Linkages And The Output Correlation Puzzle Preliminary, Do Not Cite Or Circulate

Free registration required

Executive Summary

Do open economy models with credit constraints resolve the output correlation puzzle? Building on Deverex & Yetman (2009), the authors develop a two good open economy model with international credit constraints that features both strong cross-border trade as well as - financial linkages. They show how endogenous movements in the terms of trade and labour supply allow their model to match the observed cross-country output correlations. Increasing the amount of cross-border asset holdings increases international business cycle synchronization. This model - with its strong trade linkages - is particular suited to understanding the 2007-2010 economic crisis including the 2008 world trade collapse.

  • Format: PDF
  • Size: 203 KB