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Determinants of Financial Stress and Recovery during the Great Recession

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  • Joshua Aizenman
  • Gurnain Kaur Pasricha

Abstract

In this paper, we explore the link between stress in the domestic financial sector and the capital flight faced by countries in the 2008-9 global crisis. Both the timing of emergence of internal financial stress in developing economies, and the size of the peak-trough declines in the stock price indices was comparable to that in high income countries, indicating that there was no decoupling, even before Lehman Brothers’ demise. Deleveraging of OECD positions seemed to dominate the patterns of capital flows during the crisis. While high income countries on average saw net capital inflows and net portfolio inflows during the crisis quarters, compared to net outflows for developing economies, the indicators of banking sector stress were higher for high income economies on average than for developing economies. Internal and external distress during crisis was closely interlinked with common underlying causes of both the severity of stress during the crisis and the recovery. External vulnerabilities were important in both phases, and higher international reserves did not insulate countries from stress.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 11-24.

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Length: 52 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bca:bocawp:11-24

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Keywords: Balance of payments and components; Financial markets; International topics;

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References

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  1. Aizenman, Joshua & Jinjarak, Yothin & Park, Donghyun, 2011. "International reserves and swap lines: Substitutes or complements?," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 5-18, January.
  2. Stijn Claessens & Luc Laeven & Deniz Igan & Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications From the Global Financial Crisis," IMF Working Papers 10/44, International Monetary Fund.
  3. Gaston Gelos & Robert Rennhack & James P Walsh & Pelin Berkmen, 2009. "The Global Financial Crisis," IMF Working Papers 09/280, International Monetary Fund.
  4. Rose, Andrew K & Spiegel, Mark, 2010. "Cross-Country Causes and Consequences of the Crisis: An Update," CEPR Discussion Papers 7901, C.E.P.R. Discussion Papers.
  5. Andrew K. Rose & Mark M. Spiegel, . "Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning," Working Papers 6, Department of the Treasury, Ministry of the Economy and of Finance.
  6. Olivier J. Blanchard & Mitali Das & Hamid Faruqee, 2010. "The Initial Impact of the Crisis on Emerging Market Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 263-323.
  7. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2010. "The Cross-Country Incidence of the Global Crisis," IMF Working Papers 10/171, International Monetary Fund.
  8. Abdul Abiad & Enrica Detragiache & Thierry Tressel, 2010. "A New Database of Financial Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 57(2), pages 281-302, June.
  9. Andrew K. Rose & Mark M. Spiegel, 2009. "Cross-country causes and consequences of the 2008 crisis: international linkages and American exposure," Working Paper Series 2009-18, Federal Reserve Bank of San Francisco.
  10. Ferhan Salman & Mali Chivakul & Ricardo Llaudes, 2010. "The Impact of the Great Recessionon Emerging Markets," IMF Working Papers 10/237, International Monetary Fund.
  11. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2010. "Market freedom and the global recession," CEPR Discussion Papers 7884, C.E.P.R. Discussion Papers.
  12. Jeffrey A. Frankel & George Saravelos, 2010. "Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis," NBER Working Papers 16047, National Bureau of Economic Research, Inc.
  13. Stijn Claessens & Giovanni Dell'Ariccia & Deniz Igan & Luc Laeven, 2010. "Cross-country experiences and policy implications from the global financial crisis," Economic Policy, CEPR & CES & MSH, vol. 25, pages 267-293, 04.
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Cited by:
  1. Branimir Jovanovic, 2012. "How Policy Actions Affect Short-term Post-crisis Recovery?," CEIS Research Paper 253, Tor Vergata University, CEIS, revised 05 Oct 2012.
  2. Ceballos, Francisco & Didier, Tatiana & Schmukler, Sergio L., 2012. "Financial Globalization in Emerging Countries: Diversification vs. Offshoring," ADBI Working Papers 389, Asian Development Bank Institute.
  3. Martin Feldkircher & Roman Horvath & Marek Rusnak, 2013. "Exchange Market Pressures during the Financial Crisis: A Bayesian Model Averaging Evidence," Working Papers 332, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  4. Jean Pierre Allegret, 2012. "Responses of Monetary Authorities in Emerging Economies to International Financial Crises: What Do We Really know?," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 3-32.
  5. Marcelo Bianconi & Joe A. Yoshino & Mariana O. Machado de Sousa, 2011. "BRIC and the U.S. Financial Crisis: An Empirical Investigation of Stocks and Bonds Markets," Discussion Papers Series, Department of Economics, Tufts University 0764, Department of Economics, Tufts University.

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