Regional Financial Spillovers Across Europe: A Global VAR Analysis
IMF Working Papers, February 1, 2009
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Bibliographic details
- Authors: Silvia Sgherri, Alessandro Galesi
- Published: February 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451871708.001
Summary
- Paper constructs a global vector autoregressive (GVAR) model to assess international spillovers following a historical slowdown in U.S. equity prices.
- The GVAR model contains 27 country-specific models, including the United States, 17 European advanced economies, and 9 European emerging economies.
- Country-specific foreign variables are computed using bilateral bank lending exposures.
- Main high-level conclusion: asset prices are the main short-run channel for international transmission of financial shocks; the cost and quantity of credit become more important over longer horizons.
- Additional summary point reiterated: considerable comovements of equity prices across mature financial markets, while effects on credit growth are country-specific.
Methodology
- Model used: global vector autoregressive (GVAR) model.
- Scope: 27 country-specific models linked by country-specific foreign variables based on bilateral bank lending exposures.
- Variables emphasized include equity prices, credit growth, cost of credit, and quantity of credit.
- Subject areas: Banking, Credit, Econometric analysis, Financial institutions, Financial services, Foreign banks, Interbank rates, Money, Stocks, Vector autoregression.
Key Findings and Statistics
- 27 country-specific models in the GVAR.
- Composition of the sample: United States; 17 European advanced economies; 9 European emerging economies.
- Results reveal considerable comovements of equity prices across mature financial markets.
- Effects on credit growth are found to be country-specific.
- Short-run transmission channel: asset prices.
- Longer-horizon transmission: increasing contribution from other variables such as the cost and quantity of credit.
Policy Implications and Interpretations
- Monitoring asset prices is critical for early detection of short-run international financial spillovers.
- Country-specific characteristics matter for credit growth responses; one-size-fits-all credit policies may be ineffective.
- Over longer horizons, policy attention should expand from asset prices to factors affecting cost and quantity of credit (for example, bank lending conditions and interbank dynamics).
By Silvia Sgherri and Alessandro Galesi; February 1, 2009 — IMF Working Paper.