International Propagation of Financial Shocks in a Search and Matching Environment

Marlène Isoré

No 68, FIW Working Paper series from FIW

Abstract: This paper develops a two-country multi-frictional model where the freeze on liquidity access to commercial banks in one country raises unemployment rates via credit rationing in both countries. The expenditure-switching channel, whereby asymmetric monetary shocks traditionally lead to negative comovements of home and foreign outputs, is considerably weakened via opposite forces driving the exchange rate. Meanwhile, it is proved that financial market integration forms a transmission channel per se, without resorting to international cross-holdings of risky assets. The search and matching modeling serves two purposes. First, it accounts for the time needed to restore a normal level of confidence following financial market disruptions. Second, it allows dissociating pure liquidity contractions from non-walrasian financial shocks, arriving despite global excess savings and due to heterogeneity in the quality of the banking system. The former induce negative comovements of home and foreign outputs, in accordance with the literature, whereas the new type of financial shocks does generate financial contagion.

Keywords: matching theory; financial markets; credit rationing; financial multiplier; international transmission; financial crises; open economy macroeconomics (search for similar items in EconPapers)
JEL-codes: C78 E44 E51 F41 F42 G01 G15 (search for similar items in EconPapers)
Pages: 36
Date: 2011-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-ifn and nep-mon
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Working Paper: International propagation of financial shocks in a search and matching environment (2016)
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