Global Banks, Financial Shocks, and International Business Cycles: Evidence from an Estimated Model

Kollmann, Robert

doi:10.1111/jmcb.12074

Cited by 91 publications

(49 citation statements)

References 84 publications

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“…Although Van Wincoop (), Bacchetta, Tille, and Van Wincoop (), and Perri and Quadrini () emphasize that panic reactions and self‐fulfilling expectations may have played a role for the international financial shock transmission, especially during the global financial crisis, Eickmeier and Ng () argue that more fundamental channels may have been effective, such as financial institution balance‐sheet effects (Krugman , Devereux and Yetman , Devereux and Sutherland ), arbitrage (Dedola and Lombardo ), and portfolio reallocation mechanisms (Van Wincoop ). That line of reasoning would also be consistent in the case of the U.S.‐to‐euro area transmission with Kollmann () who emphasizes the global banking channel. He shows in a two‐country DSGE model with a global bank, estimated on U.S. and euro‐area data from 1990 to 2010, that loan default shocks in the U.S. have slightly larger effects on euro‐area output than on U.S. output.…”

Section: Global Financial Shocks and Their Evolving Transmission To Isupporting

confidence: 68%

The Changing International Transmission of Financial Shocks: Evidence from a Classical Time‐Varying FAVAR

Abbate¹,

Eickmeier²,

Lemke

et al. 2016

J of Money Credit Banking

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We study the changing international transmission of US financial shocks over the period . Financial shocks are defined as unexpected changes of a financial conditions index (FCI), recently developed by Hatzius et al. (2010), for the US. We use a time-varying factor-augmented VAR to model the FCI jointly with a large set of macroeconomic, financial and trade variables for nine major advanced countries. The main findings are as follows. First, positive US financial shocks have a considerable positive impact on growth in the nine countries, and vice versa for negative shocks. Second, the transmission to GDP growth in European countries has increased gradually since the 1980s, consistent with financial globalization. A more marked increase is detected in the early 1980s in the US itself, consistent with changes in the conduct of monetary policy. Third, the size of US financial shocks varies strongly over time, with the `global financial crisis shock' being very large by historical standards and explaining 30 percent of the variation in GDP growth on average over all countries in 2008-2009, compared to a little less than 10 percent over the period. Finally, large collapses in house prices, exports and TFP are the main drivers of the strong worldwide propagation of US financial shocks during the crisis. We address the following questions: We find that expansionary US financial shocks have a considerable positive impact on the nine countries, and vice versa for negative shocks (with Australia being less affected). The transmission to GDP growth in the European countries has increased gradually since the 1980s, consistent with globalization. We also detect a more marked increase in the effect on growth in the US in the early 1980s, consistent with changes in the conduct of monetary policy. The size of US financial shocks also varies strongly over time, with the `global financial crisis shock' being larger than any other financial shock estimated over the sample under analysis.US financial shocks explain on average over all countries 30 percent of the variation in GDP growth during the crisis period, which is very large compared to a little less than 10 percent on average over the 1971-2007 pre-crisis period.We finally find that the strong worldwide propagation of the global financial crisis was due to a sharp breakdown in exports. House prices and Total Factor Productivity have also declined very strongly by historical standards in response to the adverse financial shock in most countries, which may have also contributed to an exceptionally strong decline in consumption and investment. Nichttechnische Zusammenfassung

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Section: Global Financial Shocks and Their Evolving Transmission To Isupporting

confidence: 68%

The Changing International Transmission of Financial Shocks: Evidence from a Classical Time‐Varying FAVAR

Abbate¹,

Eickmeier²,

Lemke

et al. 2016

J of Money Credit Banking

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“…Our concept of the global financial cycle is broad-based in the sense that it 4 Some studies have focused on the role of asset prices in transmitting financial shocks to business cycles (Adrian, Colla, and Shin, 2013;Geanakoplos, 2010). For recent theoretical studies of international business cycle comovement in models with financial market imperfections, see Devereux and Sutherland (2011), Dedola and Lombardo (2012), Kollmann (2013), and Perri and Quadrini (2018). For a survey on the theory and empirics of macro-financial linkages, see Claessens and Kose (2018).…”

Section: Modelling Global Financial Cyclesmentioning

confidence: 99%

Global Macro-Financial Cycles and Spillovers

Ha¹,

Köse

Otrok

et al. 2020

SSRN Journal

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We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles.Abstract. We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles. JEL Classification: E32, F4, C32, C1

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“…From Bayesian methods, Kollmann () emphasizes the role played by global banks for the international propagation of the great recession that arose from large credit losses. As for Ueda's () work, the mechanism presented resembles the one highlighted by Perri and Quadrini () and Kollmann (), as greater financial intermediary globalization leads to greater international co‐movements. In similar fashion to Ueda (), Faia () makes use of Bernanke, Gertler, and Gilchrist's () financial accelerator in an international environment.…”

Section: Related Literaturementioning

confidence: 99%

Financial frictions, interest rate dynamics, and international business cycle synchronization

Rouillard

2017

Rev International Economics

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A two-country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co-movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.

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Global Banks, Financial Shocks, and International Business Cycles: Evidence from an Estimated Model

Cited by 91 publications

References 84 publications

The Changing International Transmission of Financial Shocks: Evidence from a Classical Time‐Varying FAVAR

The Changing International Transmission of Financial Shocks: Evidence from a Classical Time‐Varying FAVAR

Global Macro-Financial Cycles and Spillovers

Financial frictions, interest rate dynamics, and international business cycle synchronization

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