Asymmetric effects of the international transmission of US financial stress. A threshold-VAR approach

During period of financial stress, the effect of financial stress shocks on economic activity might be different from what is usually observed in normal times. This paper investigates the transmission of financial stress episodes on the macroeconomy during stressed and normal periods and it explores how these events are transmitted to the Eurozone. We find that, a detrimental US financial shock leads to a worsening in economic and financial conditions both domestically and in the Eurozone. In addition, during turmoil times, financial accelerator mechanism amplifies and propagates the transmission of US financial stress shocks to the Eurozone by reducing its economic activity. Moreover, small financial stress shocks, rather than infrequent large ones, are able to create large fluctuations in inflation rates. Last, the effect of a detrimental shock in financial conditions has larger negative effects in the economy compared with the positive effects that would be generated by a beneficial shock in financial conditions. (C) 2017 Elsevier Inc. All rights reserved.