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On cross-border bank credit and the U.S. financial crisis transmission to equity markets

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  • Yan, Cheng
  • Phylaktis, Kate
  • Fuertes, Ana-Maria

Abstract

This paper examines the role played by cross-border equity, bond and bank credit flows versus international trade in the transmission of the U.S. financial crisis to equity markets worldwide. We estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries. The results from an eclectic methodology that includes causality tests, generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade. The results are robust to altering the exogenous versus endogenous vectors of variables, to measuring equity prices in U.S. dollars or local currency, to averaging the data across countries versus averaging the parameters from individual country estimation, and to redefining the start date of the crisis. The findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability.

Suggested Citation

  • Yan, Cheng & Phylaktis, Kate & Fuertes, Ana-Maria, 2016. "On cross-border bank credit and the U.S. financial crisis transmission to equity markets," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 108-134.
  • Handle: RePEc:eee:jimfin:v:69:y:2016:i:c:p:108-134
    DOI: 10.1016/j.jimonfin.2016.06.014
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    1. repec:eee:ememar:v:31:y:2017:i:c:p:96-115 is not listed on IDEAS

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    Keywords

    U.S. financial crisis; Crisis transmission channel; Capital flows; Bank credit; International trade; Emerging markets;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G1 - Financial Economics - - General Financial Markets

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