Credit constraints and the international propagation of US financial shocks

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Non-technical summaryThe 2007-08 turmoil in US financial markets gave rise to a credit crunch with widespread effects on the global economy. Considering the pivotal role of the United States in international financial markets, a key question is how financial shocks that originate from the US propagate across the globe. In particular, we ask whether US financial shocks generate global spillovers that depend nonlinearly on the severity of credit constraints in the US economy.A consensus seems to emerge from theoretical models that financial frictions are central to understanding the nonlinearities observed during financial crisis episodes. Moreover, theoretical studies have shown that financial frictions lead to an amplification of cross-border shocks, and structural models featuring such frictions provide a more realistic picture of international macroeconomic fluctuations. However, most empirical studies on macro-financial linkages resort to linear models that fail to account for the nonlinear amplification mechanisms implied by these theoretical considerations. There is an equally limited empirical literature that investigates the relation between financial frictions and global spillovers. This paper aims to fill these gaps. The novelty of this paper is to assess the impact of US financial shocks in an empiricalopen-economy model that features nonlinear dynamics. We model the dynamics of the US economy jointly with global macroeconomic and financial variables using a regimeswitching threshold vector autoregression (TVAR). This model distinguishes between "normal" and "tight" credit regimes in the US economy. The transition across regimes is determined by the level of an excess bond premium (EBP) on US corporate bonds that gauges the tightness of credit constraints in the US economy. Using data for the period from 1984 to 2012, we identify three main episodes of tight credit in US financial history.The first episode takes place during the savings and loan crisis of the 1980s, the second occurs in the early 2000s, and the third is associated with the 2007-09 financial crisis.The US economy responds asymmetrically to an adverse US financial shock, associated with an unexpected rise in the EBP. In the normal credit regime, the US economy ECB Working Paper 1954, August 2016 2 is resilient in the face of financial disturbances, and the impact of EBP shocks on the macroeconomy is not statistically significant. In contrast, EBP shock...

Size‐conditioned mandatory capital adequacy disclosure and bank intermediation

“…It is also plausible that the reduction in credit growth could be triggered by general credit supply conditions in the US economy. Metiu et al (2016) verify tight-credit episodes in US financial history, when the excess bond premium unexpectedly rises. As such, excess bond premium could be a potentially useful measure of credit supply conditions.…”

“…First, if the reduction was due to the general economic state, then the growth reduction would be evident for a broader set of banks, rather than just the disclosing group. Second, Metiu et al (2016) verify tight-credit episodes in US financial history, when the excess bond premium rose unexpectedly. As such, excess bond premium could be a potentially useful measure of credit supply conditions.…”

“…to deepen our understanding of the effectiveness of different policy tools. The bottom line is that developing an effective macroprudential policy is critical to preserving financial stability and supporting overall US 1 Studying the effects in the US is likely to have global consequences, because possible tightening of credit in this globally dominant market setting is likely to propagate international financial shocks (Metiu et al, 2016). economic activity.…”

Three essays in banking and finance: the effects of the post- global financial crisis prudential regulation on lending, corporate governance practices and shareholder value – evidence from U.S.

“…the reduction in credit growth could be triggered by general credit supply conditions in the U.S. economy Metiu et al (2016). verifies tight-credit episodes in US financial history, when the excess bond premium unexpectedly rises.…”

“…First, if the reduction was due to the general economic state, then the growth reduction would be evident for a broader set of banks, rather than just the disclosing group. Second, Metiu et al (2016) verify tight-credit episodes in U.S. financial history, when the excess bond premium was unexpectedly growing. Therefore, excess bond premium could be a good measure presenting a loan supply environment.…”