International propagation of financial shocks in a search and matching environment

No 28/2016, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper develops a two-country model in which transmission of financial shocks arises despite a flexible exchange rate regime and substitutable financial assets, contrary to the open-economy literature results under these two conditions. The search and matching approach first accounts for the time needed to restore normal functioning of financial markets following a disruption. It also allows dissociating two types of financial shocks: (i) pure liquidity contractions imply negative co-movements of home and foreign outputs, so that the model nests the standard open macroeconomy results as a particular case; (ii) shocks to banks' capitalization costs in one country do generate international financial contagion.

JEL-codes: C78 E44 E51 F41 F42 G01 G15 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2016_028

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