Asymmetries in Financial Spillovers

TL;DR

This paper develops a nonlinear multi-country model to analyze asymmetric international financial spillovers from US shocks, revealing that adverse shocks have stronger negative effects and that central banks' responses vary over time.

Contribution

It introduces a flexible nonlinear framework capable of capturing asymmetries in financial spillovers across countries and over time, advancing understanding of shock transmission.

Findings

Adverse shocks cause stronger declines in output, inflation, and stock markets.

Reactions to financial shocks are asymmetric based on shock size and sign.

Central banks' responses to shocks vary over time.

Abstract

This paper analyzes nonlinearities in the international transmission of financial shocks originating in the US. To do so, we develop a flexible nonlinear multi-country model. Our framework is capable of producing asymmetries in the responses to financial shocks for shock size and sign, and over time. We show that international reactions to US-based financial shocks are asymmetric along these dimensions. Particularly, we find that adverse shocks trigger stronger declines in output, inflation, and stock markets than benign shocks. Further, we investigate time variation in the estimated dynamic effects and characterize the responsiveness of three major central banks to financial shocks.