The Transmission of Financial Stress from Advanced to Emerging Economies
IMF Working Papers, June 1, 2009
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Bibliographic details
- Authors: Stephan Danninger, Irina Tytell, Ravi Balakrishnan, Selim A Elekdag
- Published: June 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872804.001
Overview and research scope
- Paper studies transmission of financial stress from advanced to emerging economies using a new financial stress index for emerging economies.
- An episode of financial stress is defined as a period when the financial system's ability to intermediate may be impaired.
- Previous financial crises in advanced economies passed through strongly and rapidly to emerging economies.
- The unprecedented spike in financial stress in advanced economies elevated financial stress across emerging economies above levels seen during the Asian crisis, but with significant cross-country variation.
- The extent of pass-through of financial stress is related to the depth of financial linkages between advanced and emerging economies.
Key findings
- Development and use of a new financial stress index for emerging economies to measure episodes when financial intermediation may be impaired.
- Historical pattern: financial crises in advanced economies transmit strongly and rapidly to emerging economies.
- The 2008–2009 unprecedented spike in financial stress in advanced economies raised emerging-economy financial stress above Asian crisis levels, with significant variation across countries.
- The degree of pass-through is correlated with the depth of financial linkages between advanced and emerging economies.
- Higher current account and fiscal balances:
- Do little to insulate emerging economies from transmission of financial stress in advanced economies.
- May help dampen the impact on the real sector of emerging economies.
- May help reestablish financial stability and foreign capital inflows once financial stress subsides.
Policy implications and considerations
- Monitor and assess the depth of financial linkages with advanced economies as a predictor of vulnerability to external financial stress.
- Recognize that macroeconomic buffers in the form of higher current account and fiscal balances may not prevent transmission but can:
- Reduce real-sector impacts during stress episodes.
- Facilitate restoration of financial stability and the return of foreign capital inflows after stress abates.
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- _wp09133 - References