Global Financial Crisis, Financial Contagion, and Emerging Markets
International Monetary Fund, Dec 13, 2012 - Business & Economics - 58 pages
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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aggregate aggregate demand American Economic Review Bernanke borrowing business cycle statistics capital flows Cespedes consumption Curdia current account cut off value deﬁne degree of ﬁnancial degree of trade demand for domestic denotes depreciation Devereux domestic economy domestic entrepreneurs domestic origin economy following emerging market countries emerging market economies equilibrium exchange rate regime export channel export demand external ﬁnance external risk premium ﬁnal ﬁnancial accelerator ﬁnancial contagion ﬁnancial spillovers ﬁnd ﬁrms ﬁrst ﬁxed exchange rate following the ﬁnancial foreign currency foreign economy foreign entrepreneurs foreign ﬁnancial shock Gertler global economy global ﬁnancial crisis global ﬁnancial shock impact inﬂation inflows interest rate INTERNATIONAL MONETARY FUND investment and output lenders leverage ratio macroeconomic misperception factor Monetary Economics monetary policy monitoring cost net worth nominal exchange rate optimal contract participation constraint perception of investors PH,t productivity Real Business Cycles return to capital speciﬁcation St+1 trade integration trade openness worth YX,t