Financial Fragmentation Shocks

Gabriela Castro (), José Maria and Paulo Júlio
Authors registered in the RePEc Author Service: Ricardo Mourinho Félix ()

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We define "financial fragmentation shocks" as fluctuations in credit market frictions in a small euro area economy. The shock changes the financial integration status quo of the monetary union, given its negligible international spillover. An increase in credit market frictions triggers a recession in the small economy. Perfect competition and the absence of nominal rigidities attenuate output volatility. Expectations also matter: real impacts weaken when long fragmentation time spans are perceived to be short lived. Contrarily to "risk shocks", defined as fluctuations in borrowers' riskiness, fragmentation shocks do not imply strongly countercyclical bankruptcy rates. The results are based on PESSOA, a general equilibrium model with a Bernanke-Gertler-Gilchrist financial accelerator mechanism.

JEL-codes: E27 E44 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-eec, nep-ger, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201508

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