Transmission of Financial Stress Shocks between the USA and the Euro Area During Different Business Cycle Phases

Abstract

This paper examines the transmission of financial stress shocks between the USA and the euro area for recessionary and non-recessionary regimes in the shock-recipient economy. The investigated period is 1999M1–2017M11, which includes several episodes of recessionary and non-recessionary regimes, endogenously determined by the model, as well as several financial stress episodes. After testing for non-linearity, we employ a five-variable Bayesian threshold vector autoregression model using internationally compatible data for financial stress indices. Our results show significant non-linearities in the financial stress-business cycle interactions for the euro area. In comparison to the non-recessionary regime, the US financial stress shocks are more detrimental to the stability of the European financial system, output growth, and inflation in recessions. US financial stress shocks negatively affect euro area unemployment rate, but the effect is independent of the euro area industrial production growth regime. In contrast, the stability of the US financial system is not susceptible to the euro area’s financial stress shocks. However, due to trade ties, the financial stress in the euro area does lead to output contraction, while not affecting inflation and unemployment in the US. We also found that US industrial production growth and unemployment rate are susceptible to domestic financial stress shocks, more in the recessionary than non-recessionary episodes of the US economy. The results suggest a need for a careful domestic and foreign financial stress monitoring and coordination of monetary authorities. While this may profit both economic areas, this is relevant more for the European Central Bank than its US counterpart.

Characteristics of Services and Interdependency between Export and Innovation Intensity in the Sector of the Business Services

“…In contrast, Dajčman et al (2020) found that systemic stress negatively affects industrial production in the euro area in recessionary and non-recessionary regimes.…”

“…The body of evidence on the impact of systemic stress on the (real) economy is more limited than for the financial stress. In this subsection, I focus on studies that use the CISS (see Chatterjee idr., 2017;Chavleishvili & Kremer, 2017;Chavleishvili & Manganelli, 2019;Dajčman et al, 2020;Hartmann et al, 2013;Holló et al, 2012;Kremer, 2016a;Silvestrini & Zaghini, 2015). Holló et al (2012) and Kremer (2016a) D. Romih: The Impact of Systemic Stress in the Euro Area on Bilateral Exports of Goods studied the impact of systemic stress on industrial production in the euro area.…”

“…These are the Composite Indicator of Systemic Stress (CISS) for the euro areaa weekly measure of systemic stress in the euro areadeveloped by Holló et al (2012), the NEW CISS for the euro areaa daily measure of systemic stress in the euro areadeveloped by the ECB, the SovCISS for the euro areaa monthly measure of sovereign financial stress in the euro areadeveloped by Garcia-de-Andoain and Kremer (2018), and the EURO STOXX 50 Volatility Index (VSTOXX), which is the European version of the CBOE Volatility Index (VIX). Research has shown that systemic stress is transmittable from one country to another (see Dajčman et al, 2020;Dovern & van Roye, 2014). Dajčman et al (2020) found that systemic stress is transmittable from the euro area to the US, and vice versa.…”

The heterogeneity spillover impact of U.S. permanent and temporary monetary shocks on China’s economy

“…Cushman and Zha (1997) point out that U.S. monetary policy shocks have a greater spillover effect on other countries' macroeconomies compared to other central countries' policy adjustments. Daj cman et al (2020) suggest that U.S. financial stress shocks negatively affect euro area macroeconomy. Albagli et al (2019) suggest that compared to other events, the U.S. monetary policy shocks have at least the same amount of spillover impact as the domestic monetary policy after the postglobal financial crisis.…”

EU Foreign Investment Policy – FDI Screening Mechanism to Advert Genuine Threats or Introducing Hidden Protectionism

“…This means that when a systemic financial crisis occurs, the functioning of the financial system is disrupted. Research has shown that systemic stress negatively affects the economy (see Chavleishvili & Manganelli, 2019;Dajčman et al, 2020;Kremer, 2016a). As a result, there is a growing need among policymakers and researchers at central banks to measure and monitor systemic stress.…”