The International Impact of Financial Shocks: A Global VAR and Connectedness Measures Approach

This paper examines the international impact of shocks to a large array of measures of financial frictions and financial stress. The methodology employed in this paper is twofold, it firstly utilities the Global VAR (GVAR) approach and then employs a set of Generalized Connectedness Measures (GCM) to summarise the results of this analysis. These two methodologies provide a way to rank the relative importance of different measures of financial shocks on countries and macroeconomic variables. The methodologies are applied to a data set of 17 countries, over the period 1981Q1 to 2013Q1, with 12 separate measures of financial frictions and financial stress. Utilising connectedness index measures, it is found that financial stress measures constructed from the corporate bond market are the most in uential on global macroeconomic variables and that this result is also consistent across individual countries. It is found that many proposed measures of financial stress are not net transmitters of influence but are more dependent on external factors. The paper finds little evidence to support the use of credit as a financial shock variable as is common in the literature. This variable is found to be a weak transmitter of shocks and highly influenced by shocks to other variables.