IDEAS home Printed from https://ideas.repec.org/a/eee/finsta/v7y2011i2p78-97.html

Financial stress and economic contractions

Author

Listed:
  • Cardarelli, Roberto
  • Elekdag, Selim
  • Lall, Subir

Abstract

This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil in advanced economies using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress - in particular banking distress - on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with deeper and longer downturns than stress mainly in securities or foreign exchange markets. Economies with more arm's-length financial systems seem to be more exposed to contractions in activity following financial stress, due to the greater procyclicality of leverage in their banking systems.

Suggested Citation

  • Cardarelli, Roberto & Elekdag, Selim & Lall, Subir, 2011. "Financial stress and economic contractions," Journal of Financial Stability, Elsevier, vol. 7(2), pages 78-97, June.
    • Handle: RePEc:eee:finsta:v:7:y:2011:i:2:p:78-97
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1572-3089(10)00006-9
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    2. Mr. Subir Lall & Mr. Roberto Cardarelli & Mr. Selim A Elekdag, 2009. "Financial Stress, Downturns, and Recoveries," IMF Working Papers 2009/100, International Monetary Fund.
    3. Barry Eichengreen & Michael D. Bordo, 2003. "Crises now and then: what lessons from the last era of financial globalization?," Chapters, in: Paul Mizen (ed.), Monetary History, Exchange Rates and Financial Markets, chapter 3, Edward Elgar Publishing.
    4. Enrique G. Mendoza & Marco E. Terrones, 2008. "An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data," NBER Working Papers 14049, National Bureau of Economic Research, Inc.
    5. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    6. Robert J. Shiller, 1999. "Measuring Bubble Expectations and Investor Confidence," NBER Working Papers 7008, National Bureau of Economic Research, Inc.
    7. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    8. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    9. Robert Z. Aliber & Charles P. Kindleberger & Robert N. McCauley, 2023. "Manias, Panics, and Crashes," Springer Books, Springer, edition 8, number 978-3-031-16008-0, December.
    10. Demirguc-Kunt, Asli & Detragiache, Enrica & Gupta, Poonam, 2006. "Inside the crisis: An empirical analysis of banking systems in distress," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 702-718, August.
    11. Douglas W. Diamond & Raghuram G. Rajan, 2000. "A Theory of Bank Capital," Journal of Finance, American Finance Association, vol. 55(6), pages 2431-2465, December.
    12. Kashyap, Anil K. & Stein, Jeremy C., 1995. "The impact of monetary policy on bank balance sheets," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 151-195, June.
    13. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York.
    14. Luigi Zingales & Raghuram G. Rajan, 2003. "Banks and Markets: The Changing Character of European Finance," NBER Working Papers 9595, National Bureau of Economic Research, Inc.
    15. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    16. Ackermann, Josef, 2008. "The subprime crisis and its consequences," Journal of Financial Stability, Elsevier, vol. 4(4), pages 329-337, December.
    17. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
    18. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    19. White, William R., 2008. "Past financial crises, the current financial turmoil, and the need for a new macrofinancial stability framework," Journal of Financial Stability, Elsevier, vol. 4(4), pages 307-312, December.
    20. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    21. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
    22. Sebastián Edwards, 2007. "On Current Account Surpluses and the Correction of Global Imbalances," Working Papers Central Bank of Chile 440, Central Bank of Chile.
    23. Sebastian Edwards, 2007. "On Current Account Surpluses and the Correction of Global Imbalances," NBER Working Papers 12904, National Bureau of Economic Research, Inc.
    24. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
    25. Charles A. E. Goodhart, 1996. "An Incentive Structure for Financial Regulation," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(IV), pages 637-648, December.
    26. Craig S. Hakkio & William R. Keeton, 2009. "Financial stress: what is it, how can it be measured, and why does it matter?," Economic Review, Federal Reserve Bank of Kansas City, vol. 94(Q II), pages 5-50.
    27. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    28. Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
    29. Skander J. van den Heuvel, 2002. "Does bank capital matter for monetary transmission?," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 259-265.
    30. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    31. Hildebrand, Philipp M., 2008. "The sub-prime crisis: A central banker's perspective," Journal of Financial Stability, Elsevier, vol. 4(4), pages 313-320, December.
    32. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2009. "Securitisation and the bank lending channel," European Economic Review, Elsevier, vol. 53(8), pages 996-1009, November.
    33. Claudio Borio, 2007. "Change and Constancy in the Financial System: Implications for Financial Distress and Policy," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Jeremy Lawson (ed.),The Structure and Resilience of the Financial System, Reserve Bank of Australia.
    34. Anil K. Kashyap & Raghuram G. Rajan & Jeremy C. Stein, 2008. "Rethinking capital regulation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 431-471.
    35. Gibbons, Michael R, 1987. "The Interrelations of Finance and Economics: Empirical Perspectives," American Economic Review, American Economic Association, vol. 77(2), pages 35-41, May.
    36. Hali J. Edison, 2003. "Do indicators of financial crises work? An evaluation of an early warning system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
    37. Freund, Caroline, 2005. "Current account adjustment in industrial countries," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1278-1298, December.
    38. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
    39. Stijn Claessens & M. Ayhan Kose & Marco E. Terrones, 2009. "What happens during recessions, crunches and busts? [Business cycles for G-7 and European countries]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 24(60), pages 653-700.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mr. Subir Lall & Mr. Roberto Cardarelli & Mr. Selim A Elekdag, 2009. "Financial Stress, Downturns, and Recoveries," IMF Working Papers 2009/100, International Monetary Fund.
    2. Davide Furceri & Annabelle Mourougane, 2010. "Une lecture de la crise à la lumière des crises passées," Économie et Statistique, Programme National Persée, vol. 438(1), pages 19-42.
    3. Kannan, Prakash, 2012. "Credit conditions and recoveries from financial crises," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 930-947.
    4. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, February.
    5. Ravi Balakrishnan & Stephan Danninger & Selim Elekdag & Irina Tytell, 2011. "The Transmission of Financial Stress from Advanced to Emerging Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 40-68, May.
    6. Mr. Prakash Kannan, 2010. "Credit Conditions and Recoveries from Recessions Associated with Financial Crises," IMF Working Papers 2010/083, International Monetary Fund.
    7. Schüler, Yves S. & Peltonen, Tuomas A. & Hiebert, Paul, 2017. "Coherent financial cycles for G-7 countries: Why extending credit can be an asset," ESRB Working Paper Series 43, European Systemic Risk Board.
    8. Claessens, Stijn & Kose, M. Ayhan & Terrones, Marco E., 2012. "How do business and financial cycles interact?," Journal of International Economics, Elsevier, vol. 87(1), pages 178-190.
    9. Mr. Stephan Danninger & Ms. Irina Tytell & Mr. Ravi Balakrishnan & Mr. Selim A Elekdag, 2009. "The Transmission of Financial Stress from Advanced to Emerging Economies," IMF Working Papers 2009/133, International Monetary Fund.
    10. Davide Furceri & Annabelle Mourougane, 2009. "Financial Crises: Past Lessons and Policy Implications," OECD Economics Department Working Papers 668, OECD Publishing.
    11. repec:pra:mprapa:99376 is not listed on IDEAS
    12. Markus Haavio & Caterina Mendicino & Maria Teresa Punzi, 2014. "Financial and economic downturns in OECD countries," Applied Economics Letters, Taylor & Francis Journals, vol. 21(6), pages 407-412, April.
    13. Mr. Alasdair Scott & Mr. Pau Rabanal & Mr. Prakash Kannan, 2009. "Macroeconomic Patterns and Monetary Policy in the Run-up to Asset Price Busts," IMF Working Papers 2009/252, International Monetary Fund.
    14. Apostolakis, George & Papadopoulos, Athanasios P., 2015. "Financial stress spillovers across the banking, securities and foreign exchange markets," Journal of Financial Stability, Elsevier, vol. 19(C), pages 1-21.
    15. Hermann Remsperger & Stephen G. Cecchetti & Stefan Ingves & Alberto Giovannini & Jens Weidmann & Alexandros Vardoulakis & Stefano Neri & Jürgen Stark & Elod Takáts & Christian Upper & Claudia M. Buch , 2012. "The ESRB at 1," SUERF Studies, SUERF - The European Money and Finance Forum, number 2012/4 edited by Stefan Gerlach & Ernest Gnan & Jens Ulbrich, May.
    16. Haddou, Samira, 2022. "International financial stress spillovers to bank lending: Do internal characteristics matter?," International Review of Financial Analysis, Elsevier, vol. 83(C).
    17. Baxa, Jaromír & Horváth, Roman & Vašíček, Bořek, 2013. "Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy?," Journal of Financial Stability, Elsevier, vol. 9(1), pages 117-138.
    18. Giampaoli, Noemi & Cucculelli, Marco & Sullo, Valerio, 2024. "Business and financial cycle across regimes: Does financial stress matter?," International Review of Economics & Finance, Elsevier, vol. 96(PB).
    19. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    20. Hartwig, Benny & Meinerding, Christoph & Schüler, Yves S., 2021. "Identifying indicators of systemic risk," Journal of International Economics, Elsevier, vol. 132(C).
    21. Mr. Fabian Valencia, 2008. "Banks’ Precautionary Capital and Persistent Credit Crunches," IMF Working Papers 2008/248, International Monetary Fund.

    More about this item

    Keywords

    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finsta:v:7:y:2011:i:2:p:78-97. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jfstabil .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.