tailieunhanh - The role of credit in international business cycles

The issue of the equilibrium level of credit in the economy is addressed in the liter- ature from di®erent perspectives. Several papers use theoretical models to analyze the equilibrium level of credit over business cycles by identifying phases of credit rationing or credit booms (Kiyotaki and Moore, 1997; Azariadis and Smith, 1998; Lorenzoni, 2008). In the similar spirit, DSGE models have been used recently to analyze the asymmetry in the behavior of borrowers and lenders in reaction to structural, and in particular ¯nancial shocks (Iacoviello, 2005; Gerali et al., 2010) | The role of credit in international business cycles TengTeng Xu December 2011 CWPE 1202 The role of credit in international business cycles TengTeng Xuy University of Cambridge December 2011 Abstract The recent financial crisis raises important issues about the role of credit in international business cycles and the transmission of financial shocks across country borders. This paper investigates the international spillover of US credit shocks and the importance of credit in explaining business cycle fluctuations using a global vector autoregressive GVAR model with credit estimated over the period 1979Q2 to 2006Q4 for 26 major advanced and emerging economies. Results from the country-specific models reveal the importance of bank credit in explaining output growth changes in inflation and long term interest rates in countries with developed banking sector. The generalized impulse response function GIRF for a one standard error negative shock to US real credit provides strong evidence of the spillover of US credit shock to the UK the Euro area Japan and other industrialized economies. Keywords Credit Global VAR Macro-finance linkages International business cycles. JEL Classification C32 G21 E44 E32. I am grateful to Professor M. Hashem Pesaran for his valuable guidance and continuous support. I would also like to thank Richard Louth Kamiar Mohaddes Alessandro Rebucci Til Schuermann Vanessa Smith and seminar participants at the 1st Cambridge Finance-Wharton Seminar Day Royal Economic Society Easter School 2010 the 10th Econometric Society World Congress Bank of England and Bank of Canada for useful discussions and helpful comments. I gratefully acknowledge financial support from the Overseas Research Scholarship the Smithers Co. Foundation and the Cambridge Overseas Trust. Corresponding address at Faculty of Economics University of Cambridge Sidgwick Avenue Cambridge CB3 9DD. Email tx204@. 1 1 Introduction The recent credit crunch largely originated from the .