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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 32, No. 4, pp.361-395
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2019
Received 06 Sep 2019 Revised 25 Sep 2019 Accepted 25 Sep 2019

Financial Frictions and the International Transmission of Shocks

Woong Yong Park
Woong Yong Park, Assistant Professor, Department of Economics and Institute of Economic Research, Seoul National University, 16-634, 1 Gwanak-ro, Gwanak-gu, Seoul 08826, South Korea, Tel: +82-2-880-2295 woongyong.park@snu.ac.kr

JEL Classification: E32, F41, F44, G15, G20

Abstract

This study presents a two-good, two-country model with financial frictions, where banks facing a borrowing constraint intermediate funds between households and firms. The endogenous fluctuations of international relative prices increase the business cycle comovement across countries when combined with habit formation in consumption and investment adjustment costs. Financial frictions due to the borrowing constraint of the banks further amplify the effects of productivity and capital quality shocks within a country and across the two countries.

Keywords:

Financial friction, International transmission of shock, Business cycle co-movement

Acknowledgments

I thank an anonymous referee for the helpful comments and suggestions.

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