Spillovers to emerging markets during global financial crisis

We study the effect of banking linkages on output spillovers with a specific focus on the transmission of 2007–2009 crisis from advanced countries to emerging markets. In a country-pair sample of 17 advanced economies and 11 emerging markets between 1977 and 2012, we find that, in periods without large financial crises, increases in bilateral banking linkages are associated with more divergent output cycles. This relation turns positive during the recent financial crisis suggesting that financial crises induce co-movement among more financially integrated countries. When we focus only on emerging markets, financial linkages have no effect on output spillovers during normal times but they have a positive effect during crisis times. Our interpretation of these findings is that heightened uncertainty and investor panic during large crises can amplify the spillover effects via financial linkages leading to a synchronized growth slowdown in emerging markets.