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How Does the US Credit Crisis Affect the Asia-Pacific Economies? --- Analysis based on a General Equilibrium Model

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Author Info

  • Zhiwei Zhang

    (Research Department, Hong Kong Monetary Authority)

  • Wenlang Zhang

    (Research Department, Hong Kong Monetary Authority)

  • Gaofeng Han

    (Research Department, Hong Kong Monetary Authority)

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    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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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP09_12_full.pdf
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    Bibliographic Info

    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0912.

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    Length: 25 pages
    Date of creation: Jul 2009
    Date of revision:
    Handle: RePEc:hkg:wpaper:0912

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    Keywords: Global financial crisis; Financial contagion; Global imbalances;

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    References

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    1. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    2. Devereux, Michael B. & Genberg, Hans, 2007. "Currency appreciation and current account adjustment," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 570-586, June.
    3. Hamid Faruqee & Douglas Laxton & Dirk Muir & Paolo Pesenti, 2005. "Smooth landing or crash? model based scenarios of global current account rebalancing," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    4. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
    5. Mark R. Stone & E. P. Davis, 2004. "Corporate Financial Structure and Financial Stability," IMF Working Papers 04/124, International Monetary Fund.
    6. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover?on the Effects of U.S. Government Deficits," IMF Working Papers 07/202, International Monetary Fund.
    7. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
    8. Thierry Bracke & Matthieu Bussière & Michael Fidora & Roland Straub, 2008. "A framework for assessing global imbalances," Occasional Paper Series 78, European Central Bank.
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    Cited by:
    1. Cédric Tille, 2012. "Sailing Through This Storm? Capital Flows In Asia During The Crisis," Pacific Economic Review, Wiley Blackwell, vol. 17(3), pages 467-488, 08.
    2. Zhiwei Zhang & Wenlang Zhang, 2009. "The Road to Recovery: Fiscal Stimulus, Financial Sector Rehabilitation, and Exit from Policy Easing," Working Papers 0918, Hong Kong Monetary Authority.

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