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International Transmission of Financial Shocks in an Estimated DSGE model

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  • Uluc Aysun

    ()
    (University of Central Florida, Orlando, FL)

  • Sami Alpanda

    ()
    (Bank of Canada, Ottawa, Ontario, Canada)

Abstract

This paper investigates the transmission mechanism of financial shocks across large economies. To quantify these effects, we construct and estimate a two-region open economy DSGE model with nominal and real rigidities. We model the financial side of the economies using the financial accelerator mechanism of Bernanke et al. (1999). We find that the baseline model fails to generate the high degree of macroeconomic correlation between the U.S. and Euro Area economies. Allowing for an ad hoc, cross-regional correlation in financial shocks considerably improves the model’s ability to replicate the spill-over effects of U.S. financial shocks. We then extend the baseline model by including global banking and generate an endogenous, crossregional correlation of cost of capital. Simulations demonstrate a larger Euro Area response to U.S. shocks and highlight the importance of including frictions in international financial contracts, and not only in domestic financial contracts, for more accurately capturing the international transmission of domestic shocks.

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Bibliographic Info

Paper provided by University of Central Florida, Department of Economics in its series Working Papers with number 2012-06.

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Length: 46 Pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:cfl:wpaper:2012-06

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Related research

Keywords: DSGE; financial accelerator; international business cycles; global banks;

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References

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  1. de Haas, Ralph & van Lelyveld, Iman, 2006. "Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1927-1952, July.
  2. Kollmann, Robert, 1995. "Consumption, real exchange rates and the structure of international asset markets," Journal of International Money and Finance, Elsevier, vol. 14(2), pages 191-211, April.
  3. Robert Kollmann, 2010. "Banks and International Business Cycles," 2010 Meeting Papers 1058, Society for Economic Dynamics.
  4. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
  5. James Yetman & Michael B. Devereux, 2010. "leverage constraints and the international transmission of shocks," 2010 Meeting Papers 1341, Society for Economic Dynamics.
  6. Faia, Ester, 2007. "Finance and international business cycles," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1018-1034, May.
  7. Alejandro Justiniano & Bruce Preston, 2009. "Monetary policy and uncertainty in an empirical small open economy model," Working Paper Series WP-09-21, Federal Reserve Bank of Chicago.
  8. Robert Kollmann & Zeno Enders & Gernot J. Müller, 2010. "Global Banking and International Business Cycles," Working Papers ECARES ECARES 2010-028, ULB -- Universite Libre de Bruxelles.
  9. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
  10. Drew Dahl & Ronald Shrieves & Michael Spivey, 2002. "Financing Loan Growth at Banks," Journal of Financial Services Research, Springer, vol. 22(3), pages 189-202, December.
  11. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156 National Bureau of Economic Research, Inc.
  12. Uluc Aysun & Sami Alpanda, 2011. "Global banking and the balance sheet channel of monetary transmission," Working Papers 2011-04, University of Central Florida, Department of Economics.
  13. Vladimir Yankov & Egon Zakrajsek & Simon Gilchrist, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," 2009 Meeting Papers 514, Society for Economic Dynamics.
  14. Christian Zimmermann, 1995. "International Real Business Cycles among Heterogeneous Countries," Cahiers de recherche CREFE / CREFE Working Papers 38, CREFE, Université du Québec à Montréal.
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Citations

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Cited by:
  1. Uluc Aysun & Sanglim Lee, 2013. "The determinants of the deviations from the interest rate parity condition," Working Papers 2013-03, University of Central Florida, Department of Economics.
  2. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.
  3. Aysun, Uluc & Lee, Sanglim, 2014. "Can time-varying risk premiums explain the excess returns in the interest rate parity condition?," Emerging Markets Review, Elsevier, vol. 18(C), pages 78-100.

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