Financial Globalization and Animal Spirits

Abstract

Using a multi-country general equilibrium model, we demonstrate that when agents face credit constraints in an international financial market, rational expectations, which are ex-post heterogeneous between countries, cause business fluctuations. If the international financial market becomes perfect, only a unique perfect foresight equilibrium is obtained, implying that no business fluctuations appear.Business fluctuations; Financial globalization; Sunspots; Heterogeneous agents; Rational expectations