How financial stress spreads – A first comprehensive look at the current crisis

VoxEu ^ | 04/27/09 | Ravi Balakrishnan Stephan Danninger Selim Elekdag Irina Tytell

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How financial stress spreads – A first comprehensive look at the current crisis

Ravi Balakrishnan Stephan Danninger Selim Elekdag Irina Tytell

27 April 2009

Financial stress reached unprecedented levels in 2008. This column presents a new IMF financial stress index and puts the current crisis into historical perspective. It also shows that bank-lending linkages appear to be the main driver of the transmission of stress. International financial integration brings both opportunities for growth and risks of contagion.

Financial stress in advanced and emerging economies reached unprecedented levels in 2008. After an initial period of resilience, the turmoil hit emerging economies hard. With the scale of the crisis growing, a rich debate about its similarities with past global crises and its implications for emerging economies has ensued (e.g. Eichengreen and O’Rourke 2009, Calvo and Loo-Kung 2008). However, measuring the intensity and the transmission of stress poses an empirical challenge. Measuring financial stress

Academic studies have largely relied on historical narratives of well-known systemic banking crises, when bank capital was eroded, lending disrupted, and public intervention required (e.g., Eichengreen, Rose, and Wyplosz, 1996; Laeven and Valencia 2008; Reinhart and Rogoff 2008). In contrast, episodes of financial stress in securities markets have largely been passed over, especially those episodes that involved multiple emerging economies. Previous studies also mostly viewed variables as binary – either no crisis or crisis – and hence were not able to compare the intensity of stress and the degree of transmission between countries.

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Ping!

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It spreads like.....swine flu?

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