The Transmission of Financial Stress from Advanced to Emerging Economies

53 Pages Posted: 28 Jul 2009

See all articles by Ravi Balakrishnan

Ravi Balakrishnan

International Monetary Fund (IMF) - Fiscal Affairs Department

Stephan Danninger

International Monetary Fund (Research Department)

Irina Tytell

Fidelity Investments; International Monetary Fund (IMF)

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department

Date Written: June 2009

Abstract

This paper studies how financial stress is transmitted from advanced to emerging economies, using a new financial stress index for emerging economies. An episode of financial stress is defined as a period when the financial system's ability to intermediate may be impaired. Previous financial crises in advanced economies passed through strongly and rapidly to emerging economies. In line with this pattern, the unprecedented spike in financial stress in advanced economies elevated financial stress across emerging economies above levels seen during the Asian crisis, but with significant cross-country variation. The extent of pass-through of financial stress is related to the depth of financial linkages between advanced and emerging economies. The paper finds that higher current account and fiscal balances do little to insulate emerging economies from the transmission of financial stress in advanced economies. However, they may help dampen the impact on the real sector of emerging economies and help reestablish financial stability and foreign capital inflows once financial stress subsides.

Keywords: Banking crisis, Banking sector, Capital flows, Developed countries, Developing countries, Economic models, Emerging markets, Financial crisis, Financial risk, Spillovers, Transition economies

Suggested Citation

Balakrishnan, Ravi and Danninger, Stephan and Tytell, Irina and Elekdag, Selim Ali, The Transmission of Financial Stress from Advanced to Emerging Economies (June 2009). IMF Working Papers, Vol. , pp. 1-52, 2009. Available at SSRN: https://ssrn.com/abstract=1438842

Ravi Balakrishnan

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States
001 202 623 5674 (Phone)
001 202 623 6249 (Fax)

Stephan Danninger

International Monetary Fund (Research Department) ( email )

700 19th Street, NW
Washington, DC 20431
United States

Irina Tytell (Contact Author)

Fidelity Investments ( email )

245 Summer Street
Boston, MA 02210
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

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