Financial Frictions and Global Spillovers

28 Pages Posted: 21 Jun 2016

See all articles by Norbert Metiu

Norbert Metiu

Deutsche Bundesbank

Björn Hilberg

Goethe University Frankfurt

Michael Grill

European Central Bank (ECB)

Date Written: 2015


We investigate whether frictions in US financial markets amplify the international propagation of US financial shocks. The dynamics of the US economy is modeled jointly with global macroeconomic and financial variables using a threshold vector autoregression that allows us to capture regime-dependent dynamics conditional on the tightness of US credit market conditions, measured by the excess bond premium on US corporate bonds. The US economy switches from a regime of unconstrained access to credit to one characterized by tight credit whenever the bond risk premium exceeds a critical threshold. US financial shocks have an insignificant effect on the global economy when borrowers have unconstrained access to credit. On the contrary, US financial shocks give rise to a worldwide economic contraction in the tight credit regime. Moreover, US financial shocks are a relatively more important driver of US and global business cycles in times of tight credit.

Keywords: Financial frictions, Financial shocks, Nonlinear dynamics, Spillover

JEL Classification: C32, C34, E32, G01, F44

Suggested Citation

Metiu, Norbert and Hilberg, Björn and Grill, Michael, Financial Frictions and Global Spillovers (2015). Bundesbank Discussion Paper No. 04/2015, Available at SSRN: or

Norbert Metiu (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431

Björn Hilberg

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323

Michael Grill

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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