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International Financial Integration and Crisis Intensity

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  • Andrew K. Rose

    (Asian Development Bank Institute (ADBI))

Abstract

This paper analyzes the causes of the 2008–2009 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. The analysis is conducted on a cross-section of 85 economies; I focus on international financial linkages that may have both allowed the crisis to spread across economies, and/or provided insurance. The model of the cross-economy incidence of the crisis combines 2008–2009 changes in real gross domestic product (GDP), the stock market, economy credit ratings, and the exchange rate. The key domestic determinants of crisis incidence that I consider are taken from the literature, and are measured in 2006 : real GDP per capita; the degree of credit market regulation; and the current account, measured as a fraction of GDP. Above and beyond these three national sources of crisis vulnerability, I add a number of measures of both multilateral and bilateral financial linkages to investigate the effects of international financial integration on crisis incidence. I ask three questions, with a special focus on Asian economies. First, did the degree of an economy’s multilateral financial integration help explain its crisis? Second, what about the strength of its bilateral financial ties with the United States and the key Asian economics of the People’s Republic of China, Japan, and the Republic of Korea? Third, did the presence of a bilateral swap line with the Federal Reserve affect the intensity of an economy’s crisis? I find that neither multilateral financial integration nor the existence of a Fed swap line is correlated with the cross-economy incidence of the crisis. There is mild evidence that economies with stronger bilateral financial ties to the United States (but not the large Asian economies) experienced milder crises. That is, more financially integrated economies do not seem to have suffered more during the most serious macroeconomic crisis in decades. This strengthens the case for international financial integration; if the costs of international financial integration were not great during the Great Recession, when could we ever expect them to be larger?

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23195.

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Date of creation: Jan 2012
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Handle: RePEc:eab:financ:23195

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Keywords: financial integration; financial crisis; financial linkage; Asian economies;

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  1. Andrew K. Rose & Mark M. Spiegel, 2010. "Cross-Country Causes and Consequences of the Crisis: An Update," NBER Working Papers 16243, National Bureau of Economic Research, Inc.
  2. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, vol. 40(6), pages 979-1001, November.
  3. 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.
  4. AndrewK. Rose & MarkM. Spiegel, 2010. "Cross-Country Causes And Consequences Of The 2008 Crisis: International Linkages And American Exposure," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 340-363, 08.
  5. 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.
  6. Sophia Rabe-Hesketh & Anders Skrondal & Andrew Pickles, 2004. "Generalized multilevel structural equation modeling," Psychometrika, Springer, vol. 69(2), pages 167-190, June.
  7. Gertler, Paul J, 1988. "A Latent-Variable Model of Quality Determination," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(1), pages 97-104, January.
  8. Domenico Giannone & Michèle Lenza & Lucrezia Reichlin, 2010. "Market Freedom and the Global Recession," Working Papers ECARES ECARES 2010-020, ULB -- Universite Libre de Bruxelles.
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