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Global Financial Crisis, Financial Contagion, and Emerging Markets

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  • F. Gulcin Ozkan
  • D. Filiz Unsal

Abstract

The recent global financial crisis was the first in recent history that was triggered by problems in the financial system of the mature economies. Existing work on financial crisis in emerging market countries, however, almost exclusively focus on the role of financial frictions in the domestic economy. In contrast, we propose a two-country DSGE model to investigate the transmission of a global financial crisis that originates from financial frictions in the rest of the world. We find that the scale of financial spillovers from the global to the domestic economy and trade openness are key determinants of the severity of the financial crisis for the domestic economy. Our results also suggest that the welfare ranking of alternative monetary policy regimes is determined by the degree of financial contagion, the degree of trade openness as well as the scale of foreign currency denominated debt in the domestic economy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/293.

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Length: 58
Date of creation: 13 Dec 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/293

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Keywords: Global Financial Crisis 2008-2009; Emerging markets; Trade integration; Economic integration; External shocks; Spillovers; Economic models; sudden stops; domestic economy; exchange rate regime; trade openness; contagion; financial contagion; elasticity of substitution; open economy; net exports; domestic origin; domestic goods; world economy; open economies; policy regimes; investment goods; domestic consumption; aggregate demand; balance of payments; external financing; return on capital; import prices; domestic market; transmission of shocks; import demand; imported goods; domestic demand; export prices; nominal interest rate; equilibrium model; domestic investment; exchange rate policy; external finance; crisis in emerging market; price of imports; exchange rate regimes; trade channels; domestic firms; unit of capital; protectionist policies; domestic shocks; domestic price; asset market;

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References

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Citations

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Cited by:
  1. Mara Pirovano, 2013. "Household and firm leverage, capital flows and monetary policy in a small open economy," Working Paper Research 246, National Bank of Belgium.
  2. Gabriela Lopes de Castro & Ricardo Mourinho Félix & Paulo Júlio & José R. Maria, 2013. "Fiscal multipliers in a small euro area economy: How big can they get in crisis times?," Working Papers w201311, Banco de Portugal, Economics and Research Department.
  3. F. Gulcin Ozkan & D. Filiz Unsal, 2013. "On the use of monetary and macroprudential policies for financial stability in emerging markets," Discussion Papers 13/14, Department of Economics, University of York.

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