The Changing International Transmission of Financial Shocks: Evidence from a Classical Time‐Varying FAVAR

Angela Abbate · Sandra Eickmeier · Wolfgang Lemke · Massimiliano Giuseppe Marcellino

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Global Financial Crisis and Policies Monetary Policy and Economic Impact Market Dynamics and Volatility

Abstract

We study the changing international transmission of financial shocks over the period 1971–2012. Global financial shocks are measured as unexpected changes of a U.S. financial conditions index (FCI), developed by Hatzius et al. (2010). We model the FCI jointly with a large international data set through a time‐varying parameter factor‐augmented VAR and find that financial shocks have a considerable impact on growth in the nine countries considered. Moreover, financial shocks during the global financial crisis are found to be large by historical standards. They explain approximately 20% of GDP growth variation on average over 2008–9, compared to an average of 5% prior to the crisis.

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References

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