Financial Stress, Regime Switching and Spillover Effects

February 8, 2017

In this paper we develop a multi-regime global VAR model to study the spill-over effects in financial markets.

It turns out that in both high and low stress regimes financial shocks to a country, big or small one, can have large and persistent impacts on financial markets of other countries, and only in the high stress regime financial shocks to a country can have some negative output effects on other countries. In high stress regime output shocks of a big country can have larger effects on finan- cial stress than those of a small country, while in a low stress regime output shocks of a country, big or small, have little impact on financial conditions. Further, we study the effects of global and regional shocks, as well as the spillover effects of national monetary policies and internationally coordinated policies on the financial and real sectors.

Authors: Pu Chen, Willi Semmler
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