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International Propagation of Financial Shocks in a Search and Matching Environment

Listed author(s):
  • Marlène Isoré

This paper develops a two-country multi-frictional model where the freeze on liquidity access to commercial banks in one country raises unemployment rates via credit rationing in both countries. The expenditure-switching channel, whereby asymmetric monetary shocks traditionally lead to negative comovements of home and foreign outputs, is considerably weakened via opposite forces driving the exchange rate. Meanwhile, it is proved that financial market integration forms a transmission channel per se, without resorting to international cross-holdings of risky assets. The search and matching modeling serves two purposes. First, it accounts for the time needed to restore a normal level of confidence following financial market disruptions. Second, it allows dissociating pure liquidity contractions from non-walrasian financial shocks, arriving despite global excess savings and due to heterogeneity in the quality of the banking system. The former induce negative comovements of home and foreign outputs, in accordance with the literature, whereas the new type of financial shocks does generate financial contagion.

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Paper provided by FIW in its series FIW Working Paper series with number 068.

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Length: 36
Date of creation: Apr 2011
Handle: RePEc:wsr:wpaper:y:2011:i:068
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