Financial Stress, Downturns, and Recoveries

By Subir Lall, Roberto Cardarelli, Selim A Elekdag

May 1, 2009

Preview Citation

Format: Chicago

Subir Lall, Roberto Cardarelli, and Selim A Elekdag. Financial Stress, Downturns, and Recoveries, (USA: International Monetary Fund, 2009) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress-in particular banking distress-on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Economies with more arms-length financial systems appear to be particularly vulnerable to sharp contractions, due to the greater procyclicality of leverage in their banking systems.

Subject: Asset prices, Banking, Currency markets, Economic recession, Financial crises

Keywords: Asset price, Banking system, Cost of capital, Monetary policy, Stress episode, WP

Publication Details

Pages:

58
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/100
Stock No:

WPIEA2009100
ISBN:

9781451872477
ISSN:

1018-5941

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