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Financial shocks, credit spreads and the international credit channel

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  • Ambrogio Cesa Bianchi

    (Bank of England)

  • Andrej Sokol

    (Bank of England)

Abstract

Recent empirical evidence on the cross-country synchronization of credit spreads in response to US monetary policy shocks has led to the notion of an ‘international credit channel’ of US monetary policy. This paper provides novel evidence on the existence of an international credit channel for the transmission of US financial shocks across borders, and compares their impact to US monetary policy shocks. We identify monetary policy and financial shocks by combining the external instruments approach with sign restrictions in a two-country SVAR for the United States and the United Kingdom. Adverse US financial shocks trigger a sharp and persistent contraction in the US economy, and an increase in US credit spreads. Crucially, this tightening in US credit conditions is quickly transmitted internationally, leading to an increase in credit spreads and a slowdown in economic activity in the United Kingdom. Unlike financial shocks, monetary policy shocks do not seem to induce as much international co-movement. Our results are in line with general equilibrium open economy models with credit market imperfections and a high degree of financial integration.

Suggested Citation

  • Ambrogio Cesa Bianchi & Andrej Sokol, 2017. "Financial shocks, credit spreads and the international credit channel," Bank of England working papers 693, Bank of England.
    • Handle: RePEc:boe:boeewp:0693
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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