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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 (see, for example, Devereux et al., 2006, and Gertler et al., 2007). In contrast, in this paper we propose a two-country Dynamic Stochastic General Equilibrium (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. In contrast to the existing literature, we find that the greater a country’s trade integration with the rest of the world, the greater the response of its macroeconomic aggregates to a sudden stop of capital flows. 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 Department of Economics, University of York in its series Discussion Papers with number 12/35.

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Date of creation: Dec 2012
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Handle: RePEc:yor:yorken:12/35

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Keywords: sudden stops; financial crises; emerging markets;

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Citations

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Cited by:
  1. Ricardo Félix & Gabriela Castro & José Maria & Paulo Júlio, 2013. "Fiscal Multipliers in a Small Euro Area Economy: How Big Can They Get in Crisis Times?," EcoMod2013 5307, EcoMod.
  2. PIROVANO, Mara, 2013. "Household and firm leverage, capital flows and monetary policy in a small open economy," Working Papers 2013014, University of Antwerp, Faculty of Applied Economics.
  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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