International transmission of financial shocks in an estimated DSGE model

    Authors

    S. Alpanda;U. Aysun

    Comments

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    Abbreviated Journal Title

    J. Int. Money Finan.

    Keywords

    DSGE; Financial accelerator; International business cycles; Global banks; BUSINESS CYCLES; MONETARY-POLICY; BANKING; CREDIT; ACCELERATOR; CONSTRAINTS; FRICTIONS; MARKETS; CHANNEL; Business, Finance

    Abstract

    This paper investigates the transmission of financial shocks across large economies. To quantify these effects, we estimate a two-region open economy DSGE model that includes frictions in credit markets. The baseline model fails to replicate the high correlation between the U.S. and Euro Area macroeconomic variables. Allowing for an ad hoc, cross-regional correlation in financial shocks considerably improves the model's ability to match the data. We extend the baseline model by including global banks, and generate an endogenous cross-regional correlation of borrowing costs. Simulations demonstrate large spillover effects, and highlight the importance of including frictions in international financial contracts for more accurately capturing the high cross-regional correlation. (C) 2014 Elsevier Ltd. All rights reserved.

    Journal Title

    Journal of International Money and Finance

    Volume

    47

    Publication Date

    1-1-2014

    Document Type

    Article

    Language

    English

    First Page

    21

    Last Page

    55

    WOS Identifier

    WOS:000341467500002

    ISSN

    0261-5606

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