Financial and monetary stability across Euro-zone and BRICS: An exogenous threshold VAR approach

By highlighting the asymmetries on the transmission of a shock we examine the relationship between financial stability and monetary stability in Euro-zone and BRICS countries. Our goal is to define a sound economic policy that will provide growth prospects for both regions through their trade cooperation. We derive an empirical international threshold VAR model which accounts for the presence of different regimes of financial stress and produces generalized impulse responses. We find that the zone of BRICS is better protected from exogenous inflation shocks but an endogenous inflation shock derives significant disturbance in economic activities. In Eurozone both an exogenous and endogenous inflation shock have the same short-term impact. We find also that financial shocks are transmitted from one area to another with short-term effect, but endogenously greater insistence is clear in Eurozone. We confirm as well he robustness of results, because the choice of non-linear threshold responses is meaningful since we reject the null of equal responses between IR (by SVAR) and GIR (by E-TVAR).