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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.
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.