| Abstract: |
This paper studies the link between cross-border banking activities and the
international propagation of real and financial shocks. We develop a
two-country DSGE model with a bank capital channel and a financial
accelerator, in which banks grant loans to domestic as well as to foreign
firms. The model economy is calibrated to data from the U.S. and Canada. Our
results suggest that following a positive technology shock and a tightening of
home monetary policy, the existence of cross-border banking activities tends
to amplify the transmission channel in both the domestic and the foreign
country. However, cross-border banking activities tend to weaken the impact of
shocks on foreign and home consumption because of the cross-border saving
possibility between the two countries. Finally, our simulations suggest that
under cross-border banking, correlations between macroeconomic variables of
both countries become greater than in the absence of international banking
activities. Overall, our results show sizable spillover effects of
cross-border banking on macroeconomic dynamics and suggest cross border
banking is an important source of the synchronization of business cycles
between the U.S. and Canada. |