Zhiwei Zhang (Research Department, Hong Kong Monetary Authority) Wenlang Zhang (Research Department, Hong Kong Monetary Authority) Gaofeng Han (Research Department, Hong Kong Monetary Authority)
Abstract
The current financial crisis differs from most post-war recessions in that the balance sheets of both households and banks have been severely damaged, which could lead to structural changes in the behaviour of households. Therefore, it may exert some far-reaching effects on regional economies in the short run as well as in the medium term. This paper studies these effects using a multi-country dynamic structural model. In the short run, the US credit crisis weighs heavily upon the Asia-Pacific economies through financial linkages in addition to the traditional trade channel due to the deepening global financial integration. The relative importance of various financial channels differs notably across economies. While stock market contagion is more important for advanced economies, flight to quality across borders plays a key role in less developed economies. From a medium-term perspective, changes in the US household behavior caused by the credit crisis can help correct global imbalances, but the effectiveness hinges largely upon how long US households can maintain a reasonably higher savings rate. In addition, although the declining American public savings rate may not exert material impacts on the global imbalances, it can darken regional growth prospects due to a potentially higher world real interest rate.
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Publisher Info
Paper provided by Hong Kong Monetary Authority in its series Working Papers with number
0912.
Find related papers by JEL classification: D10 - Microeconomics - - Household Behavior - - - General F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements G01 - Financial Economics - - General - - - Financial Crises
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