International Trade Finance and the Cost Channel of Monetary Policy in Open Economies

Nikhil Patel
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Nikhil Patel: International Monetary Fund

International Journal of Central Banking, 2021, vol. 17, issue 70, 62

Abstract: This paper studies the role of international trade finance in the transmission mechanism of monetary policy in a two-country dynamic stochastic general equilibrium (DSGE) framework. The model shows that trade finance can both amplify or mitigate the impact of shocks, depending on the degree to which countries differ in price stickiness and dependence on trade finance. The model is estimated with Bayesian techniques using macroeconomic data from the United States and the euro zone and reveals the impact of trade finance to be quantitatively important, especially for spillover effects of shocks across countries. It significantly alters the interpretation of the sources and propagation of business cycles. In particular, accounting for trade finance makes external shocks much less important for business cycles in the euro area. At the same time, spillover effects of U.S. monetary policy on euro-area output are much larger.

JEL-codes: E44 E52 F41 F44 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2021:q:4:a:4

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