Discussion of "Financial Intermediation in a Global Environment" (Victoria Nuguer)

The 2007-09 global financial crisis has led to a rethinking of the role of financial intermediaries for economic fluctuations. Before the financial crisis, the workhorse macro models used by policy institutions and by academic researchers abstracted from banks (e.g., Christiano et al. (2005)). The crisis has stimulated much research that incorporates banks into quantitative dynamic stochastic general equilibrium (DSGE) models. Given the global nature of the banking industry, and of the financial crisis, that research has frequently focused on open economy models; see, e.g., Devereux and Sutherland (2011), Kollmann et al. (2011, 2013), Perri and Quadrini (2011), Ueda (2012), Dedola et al. (2013), Kamber and Thoenissen (2013) and Kollmann (2013). In this new class of DSGE models, bank capital is a key state variable for real activity; negative shocks to bank capital are predicted to increase the spread between banks’ lending and deposit rates, and to trigger a fall in bank credit, investment and output; with a globalized banking system, losses on bank assets in one country can thus lead to a worldwide recession. The paper by Victoria Nuguer makes a very interesting contribution to the new literature on open economy DSGE models with banks. Her paper highlights the role of country asymmetries for the transmission of banking shocks, and for the optimal policy response to those shocks. While most related studies assume symmetric countries, Victoria Nuguer considers a world with two countries of vastly different size. Victoria Nuguer’s paper thereby provides important insights into the role of country asymmetries for the transmission of financial shocks, and for optimal policy. Her paper also suggests fascinating avenues for future research.