The Transmission of Financial Stress from Advanced to Emerging Economies

Abstract

This paper studies how financial stress, defined as periods of impaired financial intermediation, is transmitted from advanced to emerging economies using a new financial stress index for emerging economies. Previous financial crises in advanced economies passed through strongly and rapidly to emerging economies. The unprecedented spike in financial stress in advanced economies elevated 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. Higher current account and fiscal balances do little to insulate emerging economies from the transmission of acute financial stress in advanced economies, although they may still help dampen the impact on the real economy.

Financial Stress Indices and Financial Crises

“…However, in the post-deregulation period the speed of systemic stress propagation slows, but the length of the recovery from systemic stress also slows substantially. Balakrishnan et al (2011) develop a financial stress index for developing countries and examine the transmission channels of financial stress between advanced and developing countries. Likewise, using an FSI for 25 emerging markets, Park and Mercado Jr (2013) report that that not only financial stress in advanced economies, but also regional and non-regional emerging market financial stress significantly increase domestic financial stress in emerging markets.…”

The First Global Recession in Decades

“…An alternative, followed by Yilmaz (2009) uses VAR techniques to isolate periods of increased interdependence across countries. Balakrishnan et al (2009) construct an index of global nancial stress, and identify periods when the index takes exceptionally high values. Combining the ndings of this literature, I identify seven alternative episodes of global recession.…”

Changing Central Bank Transparency in Central and Eastern Europe During the Financial Crisis

“…This Section summarizes the estimation results of Equation (1). In order to see which aspects of transparency can be the most important in terms of coordinating individual expectations, not only the total index of transparency is used as explanatory variable but also some of the sub-indices measuring different aspects of transparency.…”

“…First, the transparency index is constructed in a way that it has a maximum. 1 Therefore, it cannot increase continuously forever. By the mid 2000's, transparency might have already reached its limit in the developed countries and got close to it in many other countries.…”