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International Propagation of Financial Shocks in a Search and Matching Environment
1 : Université Paris-Saclay
Université Paris-Saclay
2 : Bank of Finland
This paper develops a two-country model in which transmission of financial shocks arises despite a flexible exchange rate regime and substitutable financial assets, unlike usual results under these two conditions. This emerges from a search and matching environment between local banks and international financiers. This structure allows dissociating two types of financial shocks: (i) an asymmetric liquidity contraction implies a recession at home but an expansion abroad, nesting the standard monetary contraction open-macroeconomy literature result as a particular case; (ii) an asymmetric shock to banks' capitalization cost, which does generate recessionary effects in both countries, under the same conditions.
