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Financial shocks, credit spreads, and the international credit channel

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  • Cesa-Bianchi, Ambrogio
  • Sokol, Andrej

Abstract

We provide evidence on the international transmission of US financial shocks, and compare their effects to monetary policy and central bank information shocks in a two-country SVAR for the US and the UK. Adverse financial shocks trigger a contraction in the US economy and an increase in credit spreads. The tightening in US credit conditions is quickly transmitted internationally, leading to an increase in credit spreads and a slowdown in economic activity in the UK. As for monetary policy and central bank information shocks, cross-country comovement in credit spreads amplifies the impact of financial shocks on the real economy. Our findings support the notion of an ‘international credit channel’ as a key transmission mechanism for cross-country spillovers.

Suggested Citation

  • Cesa-Bianchi, Ambrogio & Sokol, Andrej, 2022. "Financial shocks, credit spreads, and the international credit channel," Journal of International Economics, Elsevier, vol. 135(C).
    • Handle: RePEc:eee:inecon:v:135:y:2022:i:c:s0022199621001239
    DOI: 10.1016/j.jinteco.2021.103543
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    More about this item

    Keywords

    SVAR; Credit channel; International transmission; External instruments; Sign restrictions; Financial shocks; Monetary policy shocks; Information shocks;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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