International Transmission Of Shocks Research Articles

The international transmission of shocks through the lens of foreign banks in Hong Kong

This paper studies the international transmission of shocks through the foreign bank lending channel. We find evidence that foreign banks whose parent is headquartered in a country experiencing a financial crisis significantly reduce their lending in the host country. Our results are based on studying foreign banks in Hong Kong during the 2008 US financial crisis and the 2010 European sovereign debt crisis. However, we do not find an overall decline in bank lending during the foreign crisis. Banks from crisis country with a higher deposit ratio reduced lending less. Banks from crisis country with preference for liquidity reduced lending more, consistent with liquidity hoarding during crisis.

International transmission of shocks and African forex markets

We explore the influence of oil price and geopolitical risk (GPR) on the international transmission of shocks within African forex markets. To gauge the dynamics of shock transmission, we employ the TVP-VAR connectedness model using daily data spanning over the period 2000–2023. We show that shock transmission between oil-exporting and oil-importing countries heterogeneously depends on oil and GPR innovations. We also provide empirical evidence that return and volatility shock transmission between oil, GPR and African forex rates depends on economic events and more pronounced during financial stresses, which can alter the transmission-receiver roles of the system variables. In pairs, we find that foreign exchange spillovers within and across African exporters and importers depend on oil and GPR shocks. This emphasizes the importance of utilizing the partial connectedness model to assess the linkages shared by African forex markets in the face of oil and GPR. Our results are potentially insightful for market players and forex market regulators.

State-owned banks and international shock transmission

This study re-examines the relationship between commercial bank ownership and lending growth from 1996–2019. The results show that before the 2008 financial crisis, both categories of foreign banks expanded lending, predominantly in developing countries. A shift occurred in the lending behavior of foreign banks post-2008. Bank-specific characteristics became more influential in determining credit growth. During host country banking crises, foreign state-controlled banks demonstrated higher loan growth rates than private-owned banks and reduced credit growth abroad during banking crises in home countries. Lastly, during the 2008 crisis, domestic state-controlled banks stabilized lending activity, while both types of foreign banks reduced lending.

Global banking and the international transmission of shocks: A quantitative analysis

Regulatory reforms typically follow financial crises. We propose a model of global banking that can be used proactively to study alternative regulatory policies. The model mimics the US regulatory framework and highlights the organizational choices that banks face when entering a foreign market: branching versus subsidiarization. The model is able to replicate the response of the US banking sector to the European sovereign debt crisis. Counterfactual analysis suggests that pervasive subsidiarization, higher capital requirements, or an ad hoc monetary policy intervention would have avoided entirely the negative effects of the sovereign debt crisis on US lending. However, the same measures would have had limited effects in more severe scenarios.

The transmission of euro area monetary policy to financially euroized countries

AbstractThis paper provides a comprehensive analysis of the interest rate pass‐through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than the one‐third of all euro retail rates in euroized countries of central, eastern, and south‐eastern Europe is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.

Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters

Abstract We analyze how firms choose the currency of invoicing and the implications of this choice for exchange rate pass-through into export prices and quantities. Using a new data set for Belgian firms, we find currency invoicing to be an active firm-level decision, shaped by the firm’s size, exposure to imported inputs, and the currency choices of its competitors. Our results show that a firm’s currency choice, in turn, has a direct causal effect on the exchange rate pass-through into prices and quantities. Moreover, the differential price response of similar firms that invoice in different currencies is large, persists beyond a one-year horizon, and gradually wanes in the long run. This results in allocative expenditure-switching effects on export quantities, which build up over time, suggesting a role for quantity adjustment frictions in addition to price stickiness. Our findings shed light on the mechanisms that make or break a dominant currency and the consequences it has for the international transmission of shocks.

State-Owned Banks and International Shock Transmission

State-Owned Banks and International Shock Transmission

State-Owned Banks and International Shock Transmission

State-Owned Banks and International Shock Transmission

Глобальні фінансові цикли і проблема регулювання міжнародних потоків капіталу: роль банків і макропруденційної політики у протидії кризам

The aggravation of crisis processes in the global financial system produces a request to find tools to eliminate the systemic risk of global instability, which arises primarily through the interaction between the global financial cycle, key global factors (global risk and monetary policy in major economies) and cross-border banking activities. The situation in the monetary and financial spheres of countries with large open economies has a powerful impact on the economic situation, exacerbating the asymmetries of interaction on a global scale, which actualizes the need for macroprudential authorities in countries with small open economies to take preventive measures to maintain internal balance from destructive crisis processes in key economies of the world. The article provides a comprehensive analysis of approaches to substantiating the channels of mutual influence of the internal financial cycle, the global financial cycle and macroprudential policy, and also assesses the potential of macroprudential policy in smoothing out procyclical processes in order to stimulate economic growth. The interdependence of global banks on the dynamics of the global financial cycle and vice versa is determined, because global banks determine the specifics of the manifestations of the latter, given the way they manage their liquidity on a global scale, thereby contributing to the international transmission of shocks. It is found that the existence of a domestic capital market for global banks exacerbates the international spread of domestic liquidity shocks due to the strategic complementarity effect arising from strategic interactions between banks, other financial institutions and agents, which can increase systemic vulnerabilities during booms and busts due to increased competition between banks. It was revealed that the impact of the global financial cycle on the internal financial environment of banks and financial institutions through the mechanisms of external obligations of national banks and the determination of the cost of financing affects the availability of loans for companies and households. This means that the economies of small open economies are more vulnerable to external shocks and are affected by financing conditions determined in the world's financial centers. Under these conditions, the dynamics of global liquidity limits the effectiveness of national monetary policy, and therefore the demand for effective international coordination of macroprudential policy becomes even more urgent. The need to revise monetary policy in order to increase its ability to mitigate the risks of financial instability depends on: (1) the effectiveness of macroprudential policy (for example, the ability to manage the financial cycle); (2) the contribution of monetary policy (including its traditional and non-traditional instruments) to the exacerbation of financial instability; (3) the degree of independence of monetary policy, especially during a crisis.

Cross‐border bank flows through foreign branches and the effect of a macroprudential policy

AbstractGlobal banks play an important role in the international transmission of shocks by allocating funds across the world through their foreign affiliates. Using monthly data on individual foreign bank branches in Korea from 2004 to 2018, this paper investigates how global banks propagate shocks and examines the effect of one particular macroprudential measure that was introduced to reduce the volatility of cross‐border bank flows. I find that foreign bank branches actively adjust their borrowing from headquarters by responding to changes in interest rates and the covered interest parity deviations. An important underlying heterogeneity is revealed: branches with high shares of loans in their balance sheets are more sensitive to interest rate changes, while branches with high bond shares respond more to the covered interest parity deviation. The macroprudential policy restricting the foreign exchange derivative positions of banks to be less than certain multiples of the long‐term capital does make the branches capitalize more by borrowing over the long term from parent banks, but the policy mostly affects the bond‐type branches and has no effect on total borrowing from the parent banks.

Trade credit, trade income elasticity and the international transmission of shocks

The paper examines the impact of trade credit on cyclical fluctuations in international trade. It provides new empirical evidence based on firm-level UK and Irish data showing that exporters use trade credit more actively and intensively than non-exporters. The study introduces inter-firm lending into an open economy general equilibrium model with heterogeneous firms and endogenous entry into the exports market. It demonstrates that trade credit amplifies the impact of macroeconomic shocks on international trade both along the intensive and extensive margins and that it significantly contributes to the high trade income elasticity observed in the data.

The transmission of international shocks to CIS economies: A global VAR approach

This paper employs a Global Vector Auto Regressive (GVAR) model to study the evolution of the response of the Commonwealth of Independent States (CIS) to foreign output and oil price shocks. During an observation period of two decades, cross-country trade and financial linkages experience notable changes. We find CIS countries to be highly sensitive to global and regional shocks, with that sensitivity increasing after the global financial crisis. CIS countries show the strongest responses to output shocks originating in the US, Russia and within the region itself, but their sensitivity to euro area shocks also increases substantially. Despite growing trade relations with China, the responses of CIS countries to output shocks originating in China are still relatively moderate.

International spillover of central bank swap lines - Evidence from the COVID-19 experience of Korea

Dollar funding cost rose significantly worldwide during the early stage of the COVID-19 pandemic. Against the dollar shortage, the Fed provided liquidity to 14 other central banks through central bank swap lines. I find significant liquidity spillover into Korea by comparing foreign banks from the swap network countries with banks from the other regions in their borrowing from parent banks. The spillover amounts to 11 billion dollars, half of the maximum amount Korea has drawn from the swap line. The result highlights the broad effects of the swap lines via cross-border spillover and foreign banks’ pivotal role in international shock transmission.

An Analysis of International Shock Transmission: A Multi-Level Factor Augmented Time-Varying GVAR Approach

We develop and apply a new methodology to study the transmission mechanisms of international macroeconomic and financial shocks in the context of emerging markets. Our approach combines aspects of factor analysis and GVAR models by replacing the cross-unit averages that serve as foreign variables in the GVAR model with macroeconomic and financial factors extracted hierarchically from unbalanced panels of country-level data. Furthermore, we allow for time variation in both the model parameters and shock volatility. Our key empirical findings are as follows. First, we find that the macroeconomic conditions in the emerging economies under consideration became more sensitive to global financial conditions during and after the recent financial crisis. Moreover, they appear more concerned with financial stability as they do not try to offset the contractionary effects of tightening in global financial conditions by decreasing their policy rates. Second, deterioration of financial conditions in other emerging market country groups has a loosening effect on domestic financial conditions. Third, as we include a global financial risk factor along with the US monetary policy rate, our results suggest that the contractionary effects of US interest rate shocks are taken over by the global financial risk shock. Lastly, we find some evidence that macroeconomic interdependencies among emerging economies have been increasing while their dependencies on advanced economies have been decreasing over time.

The Transmission of Euro Area Monetary Policy to Financially Euroised Countries

This paper provides a comprehensive analysis of the interest rate pass-through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroisation and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than one third of all euro retail rates in euroised countries of central, eastern and south-eastern Europe (CESEE) are linked to the euro area shadow rate. Compared to euro area monetary policy, the share of cointegration of the domestic monetary policy rate is lower, suggesting that domestic central banks in euroised countries with independent monetary policy can only partially control the `euro part´ of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission. JEL Classification: C22, C32, E43, E52, F42

Dilemma in Mean, Trilemma in Tails: The International Transmission of Financial Shocks

We study the international transmission of shocks to global financial conditions on macroeconomic tail risks in advanced and emerging economies. We show that contractionary financial and monetary policy shocks originating in the U.S. cause elevated downside risks to growth around the world. By tightening financial conditions globally, these shocks affect the left tail of the conditional output growth distribution disproportionately. This effect is particularly pronounced for countries with less flexible exchange rate arrangements, higher foreign currency exposures, and higher levels of private sector leverage. This suggests that policymakers face a trilemma, in which the exchange rate regime and macroprudential policies matter for downside risks to growth.

Informality and international business cycles

We examine the role of informal production in the international transmission of shocks. Our novel contribution is to show that informal production has an important impact on the observed cyclical properties of consumption, employment, and trade, which is effected through expenditure switching and labor re-allocation in response to productivity shocks. As such, the presence of an informal sector helps rationalize distinct empirical regularities that differentiate emerging from advanced economies. Our quantitative results highlight key structural aspects of the informal sector that are informative for the conduct of stabilization and labor market policy in emerging economies. The model is quantitatively assessed for the case of México vis-à-vis the U.S.

International Co-movements and Business Cycles Synchronization Among Advanced Economies: A SPBVAR Evidence

This paper provides new empirical insights in order to give a relevant contribution to the more recent literature on international transmission of shocks and on business cycles synchronization across developed economies, with a particular emphasis in the most recent recession and post-crisis consolidation. Interdependence, commonality and heterogeneity in macroeconomic-financial linkages are also identified in order to depict the perplexed nature of modern economies. A time-varying Structural Panel Bayesian Vector Autoregression (SPBVAR) model is developed to deal with model misspecification and unobserved heterogeneity problems when studying multicountry dynamic panels. The results argue for significant synchronization behind a relevant consolidation without delay. Additionally, consolidation is needed to underpin confidence in fiscal solvency at the country level and prevent adverse international externalities. My evidence calls for more integrated macroprudential and financial stability policies. It also shows that, when formulating policies or forecasting, additional transmission channels and economic-institutional issues through which fiscal contractions influence the dynamics of the GDP growth need to be accounted for in muticountry setups.

International Co-movements and Business Cycles Synchronization Among Advanced Economies: A SPBVAR Evidence

This paper provides new empirical insights in order to give a relevant contribution to the more recent literature on international transmission of shocks and on business cycles synchronization across developed economies, with a particular emphasis in the most recent recession and post-crisis consolidation. Interdependence, commonality and heterogeneity in macroeconomic-financial linkages are also identified in order to depict the perplexed nature of modern economies. A time-varying Structural Panel Bayesian Vector Autoregression (SPBVAR) model is developed to deal with model misspecification and unobserved heterogeneity problems when studying multicountry dynamic panels. The results argue for significant synchronization behind a relevant consolidation without delay. Additionally, consolidation is needed to underpin confidence in fiscal solvency at the country level and prevent adverse international externalities. My evidence calls for more integrated macroprudential and financial stability policies. It also shows that, when formulating policies or forecasting, additional transmission channels and economic-institutional issues through which fiscal contractions influence the dynamics of the GDP growth need to be accounted for in muticountry setups.

Essay on spillovers from advanced economics (AE) to emerging economics (EM) during the global financial crisis

PurposeThe purpose of this paper is to estimate the bond market linkages between emerging markets (EM) and advanced markets (AM) yields by estimating yield equations for EMs as a function of AM yields and illustrating the quantitative macroeconomic effects on EMs of global yield shocks in a multi-country dynamic stochastic general equilibrium modeling model.Design/methodology/approachThe research used a monthly sample of 45 advanced and EM economies covering the period 1998Q1 to 2010Q6. In this paper, the authors have shown that, indeed, there is a spillover effect from AD to EM countries and that most transmission channels, although they vary in significance, are all economically relevant. The main results of the paper underline the importance of international spillover across countries in the financial market. The strongest international transmission of shocks to EM is from the USA and the UK.FindingsThe authors find evidence that shocks in the volatility index and commodity fuels have a positive and significant impact on EM bond yield. Moreover, shocks in three-month US treasury bills, credit default swap, the London gold price and the Brent petrol price have a significant negative impact on EM bond yield. Finally, the result shows that global external shocks are found to be significant in determining bond yield and causing spillover into the EM.Originality/valueThese findings are especially important for policy makers in understanding the transmission of shocks in the bond market across different countries, as well as for risk management.