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.
|Place of Publication||Helsinki|
|Publisher||Bank of Finland|
|Number of pages||52|
|Publication status||Published - 2016|
|MoE publication type||D4 Published development or research report or study|
Fields of Science
- 511 Economics