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 Asset Prices Bernanke borrowing capital ﬂows capital inﬂows CPI Inﬂation Crisis in Foreign Curdia deadweight loss degree of trade denotes depreciation domestic and foreign domestic currency domestic economy domestic entrepreneurs economy’s emerging market countries emerging market economies exchange rate regime export channel export demand external risk premium financial accelerator financial contagion financial frictions financial spillovers fixed exchange rate ﬂuctuations foreign economy foreign entrepreneurs foreign financial shock Gertler global economy global financial crisis global financial shock Global shock household interest rate International Monetary Fund interpretation of percentage investment and output investors regarding lenders misperception factor monetary policy negative shock nominal exchange rate participation constraint percentage deviations perception of investors presented as log-deviations price adjustment costs production firms productivity of foreign Real Business Cycles regarding the productivity Responses second order approximation show the impact steady Sticky prices sudden stop trade integration trade openness two-country variables are presented