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Financial Frictions and Monetary Transmission Strength: A Cross-Country Analysis

Author

Listed:
  • Uluc Aysun

    (University of Connecticut)

  • Ryan Brady

    (Unites States Naval Academy)

  • Adam Honig

    (Amherst College)

Abstract

This paper examines the effect of financial frictions on the strength of the monetary transmission mechanism. The financial accelerator model of Bernanke, Gertler, and Gilchrist (1999) implies that the transmission mechanism of monetary policy should be stronger in countries with high levels of financial frictions. The intuition is that in these countries, external finance premiums are more sensitive to firms’ financial leverage. By affecting asset prices, therefore, monetary policy has greater impact on external finance premiums and output. We test this model’s result by estimating SVAR models on cross-country data to generate indicators for the strength of monetary transmission. We find a positive relationship between various measures of financial frictions and the strength of monetary transmission, confirming the predictions of the model.

Suggested Citation

  • Uluc Aysun & Ryan Brady & Adam Honig, 2009. "Financial Frictions and Monetary Transmission Strength: A Cross-Country Analysis," Working papers 2009-24, University of Connecticut, Department of Economics, revised Jun 2010.
    • Handle: RePEc:uct:uconnp:2009-24
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    More about this item

    Keywords

    credit channel; financial frictions; bankruptcy costs;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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