Financial factors and the international transmission mechanism
AbstractThe aim of this paper is to investigate theoretically how financial factors affect the international transmission mechanism. We build a two-country dynamic stochastic general equilibrium model with sticky prices and financial frictions. To add to the literature we extend the model to include two types of credit spread shocks that are micro-founded; a mean preserving shock to the dispersion of firms idiosyncratic productivity (risk shock) and a shock to financial agents net worth (financial wealth shock). We find that the source of the shock to the credit spread matters; credit spread shocks of equivalent size, but driven by different innovations, have different consequences for output and inflation in the home and foreign economy. In general risk shocks generate more realistic spillovers to activity than a financial wealth shock.
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Bibliographic InfoPaper provided by Bank of England in its series Bank of England working papers with number 479.
Length: 28 pages
Date of creation: 16 Aug 2013
Date of revision:
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International transmission mechanism; financial frictions; financial shocks; DSGE model;
Find related papers by JEL classification:
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-31 (All new papers)
- NEP-DGE-2013-08-31 (Dynamic General Equilibrium)
- NEP-IFN-2013-08-31 (International Finance)
- NEP-MAC-2013-08-31 (Macroeconomics)
- NEP-OPM-2013-08-31 (Open Economy Macroeconomics)
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