Hits and Runs: Determinants of the Cross-Country Variation in the Severity of Impact from the 2008-9 Financial Crisis

36 Pages Posted: 20 Aug 2013 Last revised: 3 Sep 2014

See all articles by Shane Dwyer

Shane Dwyer

Clark University - Department of Economics

Chih Ming Tan

University of North Dakota - College of Business & Public Administration - Department of Economics

Date Written: May 6, 2014

Abstract

Recent empirical work on the 2008-09 financial crisis has found mixed results on the usefulness of indicators to explain the cross-country variation in the incidence of the crisis in non-originating countries. While some authors have found success with various indicators, Rose and Spiegel (2009a,b) find that almost no indicators are robust. We employ Bayesian model averaging (BMA) to verify Rose-Spiegel’s conclusions under model uncertainty, confirming their findings. We then employ latent class models (LCM) to check the data for parameter heterogeneity. We find that there is substantial evidence of heterogeneity in the relationship between various indicators and crisis impact, both across individual indicators as well as across financial crisis episodes. In particular, a similar model fits the 1997 Asian financial crisis, although the coefficients change qualitatively in some cases. These results highlight the difficulty in employing simple linear models for early warning purposes, but demonstrate that there are robust indicators of cross-country variation in crisis impact across episodes, such as the pre-crisis growth in banking credit. A 2-class model explains the variation in crisis impact, where pre-crisis level of per-capita income assists in the prediction of membership in a particular class.

Keywords: Financial Crisis, Contagion, Bayesian Model Averaging, Latent Class Models

JEL Classification: F30, E65

Suggested Citation

Dwyer, Shane and Tan, Chih Ming, Hits and Runs: Determinants of the Cross-Country Variation in the Severity of Impact from the 2008-9 Financial Crisis (May 6, 2014). Journal of Macroeconomics, Vol. 42, 2014, Available at SSRN: https://ssrn.com/abstract=2312597 or http://dx.doi.org/10.2139/ssrn.2312597

Shane Dwyer

Clark University - Department of Economics ( email )

950 Main St
Worcester, MA 01610
United States
508-793-7226 (Phone)
508-793-8849 (Fax)

Chih Ming Tan (Contact Author)

University of North Dakota - College of Business & Public Administration - Department of Economics ( email )

293 Centennial Drive Stop 8369
Grand Forks, ND 58202-8369
United States

HOME PAGE: http://sites.google.com/site/chihmingtan/home

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