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Determinants of Financial Stress and Recovery during the Great Recession

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  • Aizenman, Joshua
  • Pasricha, Gurnain Kaur

Abstract

In this paper, we explore the link between stress in the domestic financial sector and the capital flightfaced by countries in the 2008-9 global crisis. Both the timing of emergence of internal financial stress indeveloping economies, and the size of the peak-trough declines in the stock price indices was comparableto that in high income countries. The main difference was the greater dispersion of the decline in low andmiddle countries, with standard deviation that was twice that of the high income countries. Deleveragingof OECD positions seemed to dominate the patterns of capital flows during the crisis. While high incomecountries on average saw net capital inflows and net portfolio inflows during the crisis quarters, comparedto net outflows for developing economies, the indicators of banking sector stress were higher for highincome economies on average than for developing economies. De-facto openness was associated withgreater capital outflows and greater portfolio outflows. Larger total external debt minus reserves, externalportfolio assets/GDP and external portfolio liabilities/GDP were also associated with greater internalfinancial stress. Countries with better banking supervision and higher bank capital to assets ratio sawsmaller declines in banking sector stock prices. Countries with more concentrated banking sectors alsohad more stable banking sectors in this crisis. Intriguingly, the same was true for more competitive butbetter supervised banking sectors. Central banks also seem to have responded more in countries withgreater de-facto openness.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt5cf9t5cd.

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Date of creation: 14 Sep 2010
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Handle: RePEc:cdl:ucscec:qt5cf9t5cd

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Keywords: Social and Behavioral Sciences; great recession; determinants of financial crisis; capital flows; decoupling;

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References

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  1. Joshua Aizenman & Yothin Jinjarak & Donghyun Park, 2010. "International reserves and swap lines: substitutes or complements?," NBER Working Papers, National Bureau of Economic Research, Inc 15804, National Bureau of Economic Research, Inc.
  2. 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, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 263-323.
  3. Andrew K. Rose & Mark M. Spiegel, . "Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning," Working Papers, Department of the Treasury, Ministry of the Economy and of Finance 6, Department of the Treasury, Ministry of the Economy and of Finance.
  4. Gaston Gelos & Robert Rennhack & James P Walsh & Pelin Berkmen, 2009. "The Global Financial Crisis," IMF Working Papers, International Monetary Fund 09/280, International Monetary Fund.
  5. Enrica Detragiache & Abdul Abiad & Thierry Tressel, 2008. "A New Database of Financial Reforms," IMF Working Papers, International Monetary Fund 08/266, International Monetary Fund.
  6. Andrew K. Rose & Mark M. Spiegel, 2009. "Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure," NBER Working Papers, National Bureau of Economic Research, Inc 15358, National Bureau of Economic Research, Inc.
  7. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2011. "Market Freedom and the Global Recession," IMF Economic Review, Palgrave Macmillan, Palgrave Macmillan, vol. 59(1), pages 111-135, April.
  8. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2010. "The Cross-Country Incidence of the Global Crisis," IMF Working Papers, International Monetary Fund 10/171, International Monetary Fund.
  9. Stijn Claessens & Luc Laeven & Deniz Igan & Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications From the Global Financial Crisis," IMF Working Papers, International Monetary Fund 10/44, International Monetary Fund.
  10. Andrew K. Rose & Mark M. Spiegel, 2011. "Cross-country causes and consequences of the crisis: an update," Working Paper Series, Federal Reserve Bank of San Francisco 2011-02, Federal Reserve Bank of San Francisco.
  11. 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, National Bureau of Economic Research, Inc 16047, National Bureau of Economic Research, Inc.
  12. Ferhan Salman & Mali Chivakul & Ricardo Llaudes, 2010. "The Impact of the Great Recessionon Emerging Markets," IMF Working Papers, International Monetary Fund 10/237, International Monetary Fund.
  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, CEPR;CES;MSH, vol. 25, pages 267-293, 04.
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Cited by:
  1. Martin Feldkircher & Roman Horvath & Marek Rusnak, 2013. "Exchange Market Pressures during the Financial Crisis: A Bayesian Model Averaging Evidence," Working Papers, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) 332, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  2. Francisco Ceballos & Tatiana Didier & Sergio L. Schmukler, 2012. "Financial Globalization in Emerging Countries : Diversification vs. Offshoring," Finance Working Papers, East Asian Bureau of Economic Research 23350, East Asian Bureau of Economic Research.
  3. Branimir Jovanovic, 2012. "How Policy Actions Affect Short-term Post-crisis Recovery?," CEIS Research Paper, Tor Vergata University, CEIS 253, Tor Vergata University, CEIS, revised 05 Oct 2012.
  4. 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, Department of Economics, Tufts University 0764, Department of Economics, Tufts University.
  5. 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, European Research Studies Journal, vol. 0(3), pages 3-32.

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