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International Trade Finance and the Cost Channel of Monetary Policy in Open Economies

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  • Nikhil Patel

    (International Monetary Fund)

Abstract

This paper studies the role of international trade finance in the transmission mechanism of monetary policy in a two-country dynamic stochastic general equilibrium (DSGE) framework. The model shows that trade finance can both amplify or mitigate the impact of shocks, depending on the degree to which countries differ in price stickiness and dependence on trade finance. The model is estimated with Bayesian techniques using macroeconomic data from the United States and the euro zone and reveals the impact of trade finance to be quantitatively important, especially for spillover effects of shocks across countries. It significantly alters the interpretation of the sources and propagation of business cycles. In particular, accounting for trade finance makes external shocks much less important for business cycles in the euro area. At the same time, spillover effects of U.S. monetary policy on euro-area output are much larger.

Suggested Citation

  • Nikhil Patel, 2021. "International Trade Finance and the Cost Channel of Monetary Policy in Open Economies," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-62, October.
    • Handle: RePEc:ijc:ijcjou:y:2021:q:4:a:4
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    More about this item

    JEL classification:

    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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