Banking Globalization and International Business
Cyclesby Kozo Ueda

Discussion byChristopher Waller
FRB-St. Louis1

Goal of the paper Construct a 2-country model with financial frictions tostudy the effects of asymmetric shocks.
Main results:
 Model shows that ‘credit chains’ induce positive
correlation in GDP across nations (synchronization).
 Shocks to net worth of financial intermediaries
in one country spills over to affect other economies.

2

Standard results
 RBC model:
Productivity shocks induce negative correlation
in I and Y. (Capital reallocation).
 Financial accelerator models:
Net worth of firms matters for investment.
Amplifies shocks and synchronizes Y and I Issue:
Cannot explain synchronized movements
in financial variables (lending and credit spreads).

3This paper Introduce frictions on financial intermediaries as well.
 Hslds lend to ‘investors’ (no friction)
 Investors face CSV problem with intermediaries.
Financial intermediaries net worth matters!
 Financial intermediaries face CSV problem
with entrepreneurs.
 This creates ‘chained credit contracts’.

4This paper FI’s lend across countries.
 Shocks to home FI net worth affect its lending
abroad and foreign Y & I
 Amplifies monetary policy shocks.
 Shocks to foreign entrepreneurs net worth hurts
home FI and lending at home.

5Assessment
 Simple yet effective idea.
 Chain the frictions to each other to amplify andtransmit shocks.
 Gets the main correlations right – suggests that afinancial mkt shock in one country can affect
the ROW.
 Takes intermediation seriously! (Unlike others)6Issues
 Chained credit contracts are real frictions.
 Should look at a RBC model with these frictions first.
 Allows us to understand how correlations are affected.
 Then add the sticky bits and pieces.
 Why have the complex, final good, retail good,wholesale good structure? Not the point of the paper.

7

Issues These models imply that I  firm net worth.
 Part of firm net worth is retained earnings.
 In U.S. data, aggregate retained earnings  I.
 No need to borrow from FI for I.
 The model misses this (all fin. accelerator models do).
(So, what do FI’s really do?)8Issues Claims to the net worth of major firms and FI
are publicly traded.
 This implies lots of public information on earnings.
 Contradicts the essential idea of CSV!
 How can CSV determine debt contracts of FI’s
yet their shares are publicly traded?
 Micro-foundations matter for breaking Modigliani-Miller.

9Issues Are these the types of shocks behind 2007-09 crisis?
 The common cause seemed to be driven by
eruption of severe information frictions(asymmetric info, lack of trust, sunspots).
 Assets were not contracted or priced correctly.
 CSV problems have well designed contracts andare priced appropriately. CVS not the problem.(?)

10

Issues The model has monopolistic FI’s with ongoingrelationships.
 A standard debt contract driven by CSV is probably
not optimal.
 Why don’t investors face CSV with hslds?.

11

Issues Portfolio allocation by FI’s across countries is exogenousand fixed.
 Sounds like a Lucas critique coming....
 If there was one thing that would be endogenous
for an FI it would be its portfolio allocation.
 Finally, what are the welfare costs associated withthese frictions?

12Conclusion
 Nice idea that generates good empirical results.
 Takes intermediation and information seriously.
 Do a real model first, then the sticky stuff tohelp understand the model.
 The retained earnings puzzle needs to be addressed.

13