Financial factors and the international transmission mechanism

Abigail Haddow () and Mariya Mileva ()
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Abigail Haddow: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Mariya Mileva: Kiel Institute for the World Economy

No 479, Bank of England working papers from Bank of England

Abstract: The aim of this paper is to investigate theoretically how financial factors affect the international transmission mechanism. We build a two-country dynamic stochastic general equilibrium model with sticky prices and financial frictions. To add to the literature we extend the model to include two types of credit spread shocks that are micro-founded; a mean preserving shock to the dispersion of firms idiosyncratic productivity (risk shock) and a shock to financial agents net worth (financial wealth shock). We find that the source of the shock to the credit spread matters; credit spread shocks of equivalent size, but driven by different innovations, have different consequences for output and inflation in the home and foreign economy. In general risk shocks generate more realistic spillovers to activity than a financial wealth shock.

Keywords: International transmission mechanism; financial frictions; financial shocks; DSGE model (search for similar items in EconPapers)
JEL-codes: E37 F41 F42 F44 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2013-08-16
New Economics Papers: this item is included in nep-dge, nep-ifn, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0479

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