It is not your fault, but it is your problem: global financial crisis and emerging markets

The financial and economic conditions in emerging markets (EM) responded sharply to the 2008–2009 global financial crisis (GFC). Motivated by the lack of appropriate frameworks to explore interlinkages between emerging and advanced economies, we propose a two-country model with explicit trade and financial channels. This enables us to identify the differences in the implications of domestic versus global financial crises and explore the role of real and financial cross-border spillovers. We find that (i) the interaction between the degree of trade integration and the scale of financial contagion; and (ii) the relative importance of the export versus balance sheet channels play a key role in determining the overall impact of the global financial shock. Indeed, in the wake of the GFC, while some of the very open EMs suffered substantial output losses initially, those that were able to attract the capital flowing out of the crisis-struck advanced economies recovered swiftly.