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Entrepreneurial risk shocks and financial acceleration asymmetry in a two-country DSGE model

Cody Yu-Ling Hsiao, Tao Jin, Simon Kwok, Xi Wang and Xin Zheng

China Economic Review, 2023, vol. 81, issue C

Abstract: In a two-country DSGE model tailored to the U.S. and China, we examine the macroeconomic impacts of financial frictions and entrepreneurial risk shocks, which characterize the cross-sectional dispersion of idiosyncratic entrepreneurial productivity. We identify the transmission channels for significant financial acceleration, analyze financial acceleration asymmetry, and investigate international financial acceleration. Our main findings are as follows. The estimated monitoring cost for China is significantly larger than that for the U.S. Output, investment, and loans exhibit significant financial acceleration effects triggered by shocks to domestic entrepreneurial risk, investment, and technology. In comparison with the U.S., China’s output and investment display larger financial acceleration effects induced by domestic entrepreneurial risk shocks. The financial acceleration effects of foreign entrepreneurial risk shocks on the domestic economy are insignificant. Domestic financial acceleration effects on output and investment induced by shocks to investment and technology are significantly more pronounced during the U.S.-China trade conflict periods. Domestic entrepreneurial risk shocks, which contribute substantially to economic downturns, explain about 11.2% and 12.3% of forecast error variances in output of the U.S. and China, respectively.

Keywords: Financial frictions; Entrepreneurial risk shocks; Monitoring cost; Significant financial acceleration; Financial acceleration asymmetry; Bayesian DSGE (search for similar items in EconPapers)
JEL-codes: E32 E44 F41 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:81:y:2023:i:c:s1043951x23000913

DOI: 10.1016/j.chieco.2023.102006

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China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

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