Banking Globalization and International Business Cycles
Kozo Ueda
Bank of JapanMay 26, 2010

Ueda(BOJ)

International CCC

May 26, 2010

1 / 25

Outline
In the recent credit crisis, we observed
Global downturns on the real and …nancial sides
Deterioration in …nancial intermediaries’(FIs) credit conditions

I construct a DSGE model which explains those observations.
Credit-constrained FIs which engage in cross-border lending

Key to understanding the recent …nancial crisis
1

FIs’globalization2

FIs’net worth shock

3

FIs’credit constraints

Ueda(BOJ)

International CCC

May 26, 2010

2 / 25Related Literature and Stylized Facts(2005Q1=100)

120

GDP

Cross-border lending(2005Q1=100)
600

115

500

110400USJapanEuropeIceland
IrelandDeveloping Countries

300

105
USJapanEuro area
Iceland
Ireland

100
95

200
100
0900506(2005Q1=100)

190

0708

05

09

Investment

200
160
140

150

0708

09

0708

09

USJapanEurope180
17006(2005Q1=100)

120

130

100

11080
USJapanEuro area
Iceland
Ireland

90
70

05

06

500506

Ueda(BOJ)

0708

09

International CCC

May 26, 2010

3 / 25

Stock prices(2005M1=100)

180

Corporate bond spreads (AA)(%)
6
NASDAQ

160

5

NIKKEI

US

FT100
14041203100280

1JapanEurope

60

00506

0708090506(%)

FIs' net worth (equities)(2005Q1=100)070809Corporate bond spreads (BBB)

10170

9150
1308US

7Japan6Europe5110

4US9070

Japan

3Euro area

21050
05

06

Ueda(BOJ)

0708

0905

International CCC

06

07

08

09

May 26, 2010

4 / 25

Theoretical Studies on Bilateral Correlations (1)Correlation (quantity) puzzle
International RBC model by Backus, Kehoe, and Kydland (1992)
predicts a negative correlation.
Suppose a productivity shock. It is e¢ cient to increase I and L in themore productive country and reduce I and L in the less productivecountry. ! Negative bilateral correlation.

Ueda(BOJ)

International CCC

May 26, 2010

5 / 25

Theoretical Studies on Bilateral Correlations (2)Frictions in the …nancial markets resolve the puzzle.
Baxter and Crucini (1995), Heathcote and Perri (2002), Iacovielloa andMinetti (2006), Faia (2007), Dedola and Lombardo (2009), andDevereux and Yetman (2009).

However,
No explicit role of FIs. No e¤ect of banking globalization
Unexplained movements other than GDP

Ueda(BOJ)

International CCC

May 26, 2010

6 / 25

(2) Macroeconomic E¤ects of FIs

Empirical studies
Declines of FIs’net worth generate a macroeconomic downturn.
Peek and Rosengren (1997, 2000), Calomiris and Mason (2003), Anari,Kolari and Mason (2005), Ashcraft (2005)

Common lender e¤ect
Kaminsky and Reinhart (2000), and Van Rijckeghem and Weder (2003)

Ueda(BOJ)

International CCC

May 26, 2010

7 / 25

Theoretical Studies
Macroeconomic model with FIs’credit frictions
Bernanke and Blinder (1988), Goodfriend and McCallum (2007), Vanden Heuvel (2008), Gerali, Neri, Sessa, and Signoretti (2008), Dib(2009), Gertler and Karadi (2009), Gertler and Kiyotaki (2010), Curdiaand Woodford (2009)

Macroeconomic model with both FIs’and entrepreneurial credit
frictionsHolmstrom and Tirole (1997)
Hirakata, Sudo, and Ueda (2009, 2010). Bernanke, Gertler andGilchrist (1999, hereafter BGG)’s contracts become ChainedCredit Contracts (CCC).

Ueda(BOJ)

International CCC

May 26, 2010

8 / 25

Contribution

Develop a DSGE model with:
Credit-constrained FIs and chained credit contracts
Two countries: banking globalization and cross-border lending

Explain business cycle synchronization
For real and …nancial variables
E¤ect of banking globalizationE¤ect of credit-constrained FIs

Ueda(BOJ)

International CCC

May 26, 2010

9 / 25ModelUeda(BOJ)

International CCC

May 26, 2010

10 / 25

Chained Credit Contracts (CCC, No banking globalization)

Firms

I

REQK

Capital producers

QK
Entrepreneur j in bank i

NF

FI i

NE

Loan of QK-NE

Entrepreneurs’FIs’

balance sheet

balance sheet

Loan of QK-NF-NE

QK- NE

QK- NF- NE
QK- NE

QK

NF

InvestorsNE

Ueda(BOJ)

International CCC

May 26, 201011 / 25

CCC under Banking Globalization
Banking globalization parameters τ E and τ F
Exogenous (portfolio choice is not incorporated)
They determine the allocation of …nance between the home and foreigncountry.

Investor

1−τFInvestor
1−τFτF

τFFI with NF
1−τE

FI with NF*

τE

Entrepreneur with NE

Ueda(BOJ)

International CCC

τE

1−τE

Entrepreneur with NE*

May 26, 201012 / 25

Credit Market

Investors, FIs, and entrepreneurs make CCC.
Hirakata, Sudo, and Ueda (2009, 2010) extending BGG (1999)
Costly state veri…cation (CSV) both for FIs’and entrepreneurial
idiosyncratic productivity ω F , ω E
FIs’and entrepreneurial net worths matter.
Monopolistic FIs optimize the content of CCC so as to satisfy investors’
and entrepreneurial participation constraints.
FIs specify ω F and ω E so that FIs (entrepreneurs) default if ω F < ω F(ω E < ω E ), and FIs (entrepreneurs) repay debts of ω F (ω E )otherwise.

Ueda(BOJ)

International CCC

May 26, 201013 / 25

Optimal Chained Credit Contract (CCC)

Cost-of-funds (premiums) depend on four net worths.
Et RHE s t +1
RUeda(BOJ)

=FNF
NE
NF
NE,,,
QKH QKH Q KH Q KH

International CCC.

May 26, 201014 / 25

Calibration

The U.S. data suggests:
FN = 0.1
Net worth is biased to entrepreneurial sector so that we have QKE

N = 0.5.
and QK

Credit market parameters are calibrated.
Banking globalization τ F and τ E (exogenous)
Roughly, (τ E + τ F )/2 is 0.15 for the US, 0.1 for Japan, and 0.35 for
the Euro area.

Ueda(BOJ)

International CCC

May 26, 201015 / 25

Cost-of-Funds for Entrepreneurs
Focus only on the credit market (not general equilibrium)
1.03

H RE1.03
FEFEτ =τ =01.028

τ =τ =0.5

1.026

1.024

1.024

1.022

1.022

1.02

1.02

1.018

1.018

1.016

1.016

1.014

1.014

1.012

1.012

00.05

1.01
-0.05

F(BOJ)

00.05

F

F N /QK

Ueda

E

1.028

1.026

1.01
-0.05

F R

F N /QKInternational CCC

May 26, 201016 / 25

Goods Market

Based on the two-country model of Backus, Kehoe, and Kydland(1992), and its sticky price extension by Clarida, Gali, and Gertler(2002)
Tradable two consumption goods
Immobile labor and physical capital
Calvo-type sticky prices

Ueda(BOJ)

International CCC

May 26, 201017 / 25

Goods Market

C (s t ) in H:
C s t = (1γ)1/η CH s t(η 1 )/η

+ γ1/η CF s t(η 1 )/η η/(η 1 ).

γ : inverse of the home bias
γ is 0.15 for US and Japan.

Ueda(BOJ)

International CCC

May 26, 201018 / 25

Simulation

Ueda(BOJ)

International CCC

May 26, 201019 / 25

FIs’Net Worth Shock in H (1)Business cycle synchronization
No synchronization without banking globalization (τ = 0)
Common lender e¤ect
0x 10-3H GDP2-0.5-10(BOJ)x 105-3101520

H Investment-220-20x 105101520-4F-3

H N /QK

2-10-1.5-2-2Ueda

0-1-0.5-4F GDP0-0.5-1.5x 1005101520-4International CCC

0x 105-40x 101015201520

F Investment

510F-4F N /QK

CCC τ=0.1
CCC τ=005101520May 26, 2010

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FIs’Net Worth Shock in H (2)4x 10-4

H premium1.5x 10-4F premium

120.501x 105-3101520HQ0500-1-5-200x 105-3101520

Loan F I to H FI-10-0.005-1-0.010(BOJ)

5100x 1005-41520-0.015

1015201520FQ

510Loan H FI to F E

0-0.5-1.5Ueda

0CCC τ=0.1
CCC τ=00

International CCC

5101520May 26, 2010

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FIs’Net Worth Shock in H (3)No e¤ect in BGG
0x 10-3H GDP

0x 10-4

F GDP-0.5-0.5-1-100x 105-3101520

H Investment

0-0.5-10-1.50x 105-41015201520F Investment-20x 105101520-4F-3

H N /QK

20x 10510F-4F N /QK0-1

CCC τ=0.1-2-2

Ueda(BOJ)

05101520-4International CCC

BGG τ=0.1
05101520

May 26, 201022 / 25

Predicted GDP Bilateral Correlations
Globalization in FIs’lending (τ E ) yields positive correlations.

GDP correlation

FIs net worth shock
11

1

0.8

0.8

0.8

0.6

0.6

0.6

0.4

0.4

0.4

0.2

0.2

0.2

00-0.2

00.2

0.4

-0.2

00γ0.20.4-0.2

0F

0.2

0.4Eτ

τ

Technology shock
11

0.8

0.8

0.8

0.6

0.6

0.6

0.4

0.4

0.4

0.2

0.2

0.2

000-0.2-0.2-0.2

GDP correlation

100.2

0.4
γ

Ueda

(BOJ)

00.2

0.4
F

τ

International CCC

CCC
BGG

00.2

0.4
E

τ

May 26, 201023 / 25

What We Find

Key to the recent …nancial crisis
FIs’globalization
FIs’credit constraint
FIs’net worth shock

As globalization intensi…es, policy comes to have greater globalimpacts.
Besides the dollar swap program, a reduction in policy rates and capital
injection policy.

Ueda(BOJ)

International CCC

May 26, 201024 / 25

Applications

Foreign assets and global imbalances
Various policies, such as pegged exchange rate policy, a currency
swap program, capital injection policy, macroprudential policy
Welfare changes when two countries with di¤erent …nancial
technology are interconnected with di¤erent …nancial openness.
More complex credit network

Ueda(BOJ)

International CCC

May 26, 201025 / 25