Working Paper: CEPR ID: DP8341
Authors: Sandra Eickmeier; Wolfgang Lemke; Massimiliano Marcellino
Abstract: We study the changing international transmission of US financial shocks over the period 1971-2009. 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 1971-2007 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.
Keywords: financial conditions index; financial markets; global financial crisis; globalization; international business cycles; international transmission channels; time-varying FAVAR
JEL Codes: C3; C5; F1; F15; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US financial shocks (F65) | GDP growth in other countries (F69) |
| Positive US financial shocks (G19) | GDP growth in other countries (F69) |
| Negative US financial shocks (F65) | GDP growth in other countries (F69) |
| US financial shocks (F65) | GDP growth in European countries (O52) |
| Global financial crisis (F65) | US financial shocks (F65) |
| Large collapses in house prices (R31) | strong propagation of US financial shocks during the crisis (F65) |
| Exports (F10) | strong propagation of US financial shocks during the crisis (F65) |
| Total factor productivity (TFP) (O49) | strong propagation of US financial shocks during the crisis (F65) |