International Financial Integration and Crisis Intensity
Abstractï»¿This paper analyzes the causes of the 2008â€“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 2008â€“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 economyâ€™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 Peopleâ€™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 economyâ€™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 InfoPaper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 23195.
Date of creation: Jan 2012
Date of revision:
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More information through EDIRC
financial integration; financial crisis; financial linkage; Asian economies;
Other versions of this item:
- Andrew K. Rose, 2012. "International Financial Integration and Crisis Intensity," Finance Working Papers 23195, East Asian Bureau of Economic Research.
- Rose, Andrew K., 2012. "International Financial Integration and Crisis Intensity," ADBI Working Papers 341, Asian Development Bank Institute.
- E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
- F30 - International Economics - - International Finance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-14 (All new papers)
- NEP-MAC-2012-03-14 (Macroeconomics)
- NEP-MON-2012-03-14 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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