Financial exposure and the international transmission of financial shocks

Release date
01/10/2013
Reference
DP2013/06
Authors
Güneş Kamber; Christoph Thoenissen
Published as

Kamber, Güneş and Christoph Thoenissen (2013). ‘Financial exposure and the international transmission of financial shocks’, Journal of Money, Credit and Banking, Wiley, Volume 45, Pages 127-158, DOI: https://doi.org/10.1111/jmcb.12073.

This paper analyzes the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks.