Assignment 1: Discussion—Global Stock Market and Exchange Rate Fluctuations

Here is the Assignment :

Financial crises have short-term and long-term effects. However, most often analysts are focused only on short-term effects. In this assignment, you will be challenged to look for short-term and long-term effects and to compare the effects of two financial crises: one from 1997 and one from 2007.

Using the Argosy University online library resources and the Internet, conduct research into the 1997 South Asian financial crisis and the financial crisis that began in 2007.

Then, do the following:

Evaluate each financial crisis in terms of its impact on the international financial markets.
How significantly were global stock markets affected?
How did the major currencies react during each crisis?
What are the lessons to be learned from each crisis?

Be sure to cite your sources.

Write your initial response in a minimum of 300 words. Apply APA standards to citation of sources.

SUMMARY

The financial crisis of 2007–2008 is rooted in a number of factors, som

common to previous financial crises, others new. Analysis of post-crisis macro-

economic and financial sector performance for 58 advanced countries and emerg-

ing markets shows a differential impact of old and new factors. Factor

common to other crises, like asset price bubbles and current account deficits, help

to explain cross-country differences in the severity of real economic impacts

New factors, such as increased financial integration and dependence on whole-

sale funding, help to account for the amplification and global spread of the

financial crisis. Our findings point to vulnerabilities to be monitored and areas

of needed national and international reforms to reduce risk of future crises and

cross-border spillovers. They also reinforce a (sad) state of knowledge: much of

how crises

start and spread remains unknown.

— Stijn Claessens, Giovanni Dell’Ariccia, Deniz Igan and Luc Laeven

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Economic Policy April 2010 Printed in Great Britain
� CEPR, CES, MSH, 2010.

Cross-country experiences and
policy implications from the
global financial crisis

Stijn Claessens, Giovanni Dell’Ariccia, Deniz Igan
and Luc Laeven

IMF, University of Amsterdam, and CEPR; IMF and CEPR; IMF; IMF, CentER, Tilburg
University, and CEPR

1. INTRODUCTION

Adverse events in global financial markets starting in mid-2007 and intensifying in

late 2008 triggered the most severe financial crisis since the Great Depression, in

terms of both economic costs and geographical reach. Almost all advanced coun-

tries and most major emerging markets experienced high levels of financial stress

and reduced economic activity. Yet, not all countries were affected at the same

time or to the same extent. Some were impacted mainly through rapid financial

spillovers and others through the subsequent collapse in international trade. As a

result, while many advanced economies and other countries with direct exposures

to US assets showed increased financial stress as early as 2007Q4 and output losses

as early as 2008Q1, it was not until 2008Q3 that the crisis spread beyond this

group to other countries. The magnitude of the impact also differed greatly among

The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF pol-

icy. We would like to thank Tullio Jappelli, Philippe Martin (the Editors), Tam Bayoumi, Olivier Blanchard, Sylvester

Eijffinger, and Laura Kodres for useful comments, and Zeynep Elif Aksoy and Jeanne Verrier for help with the data. The

paper draws on joint work with other colleagues at the IMF. Contact information: sclaessens@imf.org; gdellariccia@imf.org;

digan@imf.org; llaeven@imf.org.

The Managing Editor in charge of this paper was Philippe Martin.

Economic Policy April 2010 pp. 267–293 Printed in Great Britain
� CEPR, CES, MSH, 2010.

GLOBAL LINKAGES AND GLOBAL POLICIES 269

countries. Romania’s and Latvia’s GDPs, for example, dropped by more than 25%

in real terms between 2008 and 2009, while over the same period Egypt and Leba-

non continued to post brisk growth rate

This paper aims to improve our understanding of the causes of the crisis and

how it spread. We first draw on historical perspectives to review the causes of the

recent global financial crisis, with a focus on its international dimensions. This anal-

ysis suggests that the crisis stemmed from multiple factors, some common to previ-

ous financial crises, others new. The paper next examines empirically some of the

channels and mechanisms through which the financial crisis propagated across

countries. It shows that this crisis, with its roots in complex financial systems, prop-

agated mostly through international financial connections. And it investigates the

link between the impact of the crisis and countries’ characteristics. Given the origin

of the crisis and the propagation mechanisms, the econometric analysis focuses on

a sample of countries most integrated with world financial markets and trade: speci-

fically most advanced economies and the major emerging markets.

The empirical analysis shows that, as in an epidemic, those countries that had

closer links with the US financial system or direct exposure to asset backed securi-

ties (those closer to patient zero) were the first to be affected. And, also as in an epi-

demic, those countries with home-grown vulnerabilities (the weaker individuals),

displaying features such as rapid credit growth and high leverage, asset price bub-

bles, and large current account imbalances, were the most severely hurt. Finally,

those countries that had more room for policy intervention (individuals with better

access to care) were able to bounce back relatively earlier and faster than others.

The empirical results, though, leave much unexplained and fall short of support-

ing a ‘foolproof’ or ‘one-size-fits-all’ list of early warning indicators. They do point,

however, to areas where vulnerabilities might be detected. These include asset-price

bubbles (especially if fuelled by credit growth), accumulation of private sector debt,

increasing dependency on external and wholesale funding, and failure to reduce

public debt and build up fiscal room in good times. Based on these and other

results, the paper identifies the main lessons for reform, including lessons for macro-

economic policy and financial regulation, with a special emphasis on international

dimen

sions.

Several recent and contemporaneous studies have investigated whether initial

conditions and global factors can explain the differential impact of the crisis across

countries. For example, in two related papers, Rose and Spiegel (2009a, b) find that

initial conditions generally do a poor job in explaining the economic performance

of countries during the crisis period. They conclude that global factors played a

dominant role in this crisis. There are, however, a few exceptions to their general

finding of inconclusive relationships. Countries that experienced large run-ups in

asset prices and countries with larger current account deficits were likely to be

affected harder in economic performance. They also find some weak evidence that

270 STIJN CLAESSENS ET AL.

higher credit growth prior to the crisis was positively associated with the severity of

the crisis impact.

Giannone et al. (2010) also observe that the global crisis has affected countries

around the globe in much the same way, at least more than would be evident

based on ex-ante measures of vulnerabilities. They conclude that the culprit has been

the liberalization of credit markets. While fostering financial deepening and eco-

nomic growth, this reduced the financial system’s ability to insulate the economy

from financial shocks.
1

Lane and Milesi-Ferretti (2010) show that the crisis hit

advanced economies the hardest. They also highlight the importance of various

measures of buoyancy of economic activity pre-crisis (current account deficits, credit

growth rates, growth rate relative to trend) and exposure to trade and production

of traded goods in explaining the decline in output and demand growth rates.
2

Our empirical approach is similar to these papers. We analyse, however, a set of

initial conditions that includes some variables not considered in these other studies,

use a different sample of countries, and study different outcome variables, including

a measure of financial distress. One of the new variables we add is a measure of

banks’ exposure to foreign claims. This captures the possibility that shocks are

transmitted cross-border through globally operating banks, in the spirit of earlier

work on financial contagion (e.g., Eichengreen et al., 1996; Glick and Rose, 1999;

Kaminsky and Reinhart 2000; Van Rijckeghem and Weder, 2001). Overall, our

results are broadly consistent with other studies in that, while we find that some ini-

tial conditions help explain the severity of the crisis (such as credit growth, asset

price appreciation, and current account balances), the explanatory power of initial

conditions remains weak. As such, our findings reinforce that much of how crises

start and spread remains unknown.

The paper is organized as follows. Section 2 reviews how the crisis originated,

paying particular attention to commonalities and differences with prior crises, and

summarizes the pre-crisis conditions in domestic and international economic spheres.

Section 3 investigates how the crisis evolved and spread, and reports the results of

our econometric analysis. It shows how a country’s economic and financial sector

performance during and following the crisis depends on its initial conditions, differ-

entiating economic and financial impacts of the crisis and the relative importance of

domestic and international dimensions. Section 4 draws on these empirical findings

to provide lessons for macroeconomic policy and reform of national and inter-

national financial architectures and identifies areas where more research is needed.

1
There are also ongoing efforts to assess the effectiveness of macroeconomic policies to mitigate the fallout from the financial

crisis on the real economy and restore economic growth. For example, Almunia et al. (2010), by comparing the relative

effectiveness of fiscal and monetary policy during this crisis and the Great Depression, conclude that macroeconomic policies

can have a stabilizing impact on economic performance and caution against preemptive withdrawal of such accommodative

policies.
2

See also Berkman et al. (2009) for an explanation of cross-country differences.

GLOBAL LINKAGES AND GLOBAL POLICIES 271

2. PRE-CRISIS CONDITIONS

2.1. Conditions common to past financial crises

The run-up to the crisis was characterized by a number of features that (at least

ex-post) were easily recognizable as classic telltales of banking crises (see Honohan

and Laeven, 2005; Laeven and Valencia, 2008; and Reinhart and Rogoff, 2009,

for descriptions of typical financial crises). These included sharp (and ex-post un-

sustainable) asset price increases, credit booms that led to excessive debt burdens,

and the build-up of marginal loans and systemic risk.

House prices increased sharply around the world prior to the current crisis

(Figure 1), particularly in the US, the UK, Spain, Ireland, and several East Euro-

pean countries. This pattern is reminiscent of those in other major financial crises

episodes, such as the developments in the previous (Big 5) banking crises in

advanced economies (Finland, 1991; Japan, 1992; Norway, 1987; Sweden, 1991;

and Spain, 1977), as has been observed by Reinhart and Rogoff (2008).

In many countries, these asset price booms were accompanied by fast growth in

credit. Again, several countries in Eastern Europe (and the Baltics in particular),

the UK, Spain, Ireland and Iceland witnessed episodes of rapid growth in credit

aggregates, with some episodes especially sharp and prolonged.
3

Episodes of rapid

160

France Current
UK Current
Spain Current
Ireland Current
New Zealand Current
Sweden Current
US Current
Big

100

120

–20 –16 –12 –8 –4 0 4 8

Figure 1. Asset price bubble this time: sharply rising housing prices preceded
the crash, typical of banking crises

Note: Real house price index is equal to 100, five years prior to the banking crises. Big 5 refers to the average
of indices for the five major banking crises (Spain 1977, Noway 1987, Finland 1991, Sweden 1991 and Japan
1992). For the current crisis, the beginning date is assumed to be 1077Q3. House price series for the US is
the S&P Case-Shiller National Home Price Index.
Sources: BIS, OECD, and Haver Analytics.

3
The prolonged US credit expansion in the run-up to the crisis is similar to other episodes, except that it was concentrated

in one segment, namely, the subprime mortgage market.

272 STIJN CLAESSENS ET AL.

credit growth tend to coincide with large cyclical fluctuations in economic activity,

with the current account deteriorating in the upswing (Mendoza and Terrones,

2008; Claessens et al., 2009). Historically, the probability of a crisis increases with a

boom, and the more so the larger the size of the boom and the longer its duration

(Barajas

et al., 2009).

Increases in leverage and declines in lending standards in turn often link asset

price and credit booms to subsequent financial crises. In the US, the boom in credit

to households was associated with a decline in lending standards and creation of

marginal assets, such as subprime loans, whose viability crucially depended on con-

tinued favourable conditions, particularly rising house prices. As a result, default

correlations across loans intensified, as confirmed ex-post by escalating delinquencies

when house prices declined. Indeed, delinquency rates increased more in areas with

greater increases in loan origination (Figure 2; Dell’Ariccia et al., 2008b).

This pattern extended to other countries caught in the current storm, especially

the UK, Spain, Iceland, and several central and eastern European countries. Often

also fuelled by rapid expansion in mortgages, household indebtedness in these

countries rose rapidly (International Monetary Fund [IMF], 2008b), leaving house-

holds vulnerable to a decline in house prices, a tightening in credit conditions, and

a slowdown in economic activity.
4

In many central and eastern European countries,

the pattern involved large portions of domestic credit being denominated in foreign

currency (Árvai et al., 2009). Lower interest rates on foreign currency increased

affordability, at least on a cash flow basis. However, as for subprime mortgages, the

viability of these loans depended critically on one macroeconomic variable, this

15
Delinquency and Credit Growth by Metropolitan Statistical Area (in percent)

–5

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Change in Loan Origination (2000–04)

Figure 2. In booms, lending standards often deteriorate, as they did in the
current episode in the US regions

Sources: HMDA, Inside Mortgage Finance, IMF staff calculations.

4
In related work, Jappelli et al. (2009) study the determinants of household indebtedness and conclude that institutional char-

acteristics are a key factor in determining cross-country variation in the level and riskiness of household debt.

GLOBAL LINKAGES AND GLOBAL POLICIES 273

time the exchange rate. As has happened before (e.g., East Asia before its 1997 cri-

sis), borrowers’ creditworthiness and their ability to service the debt relied heavily

on exchange rate stability. The result was, again, high default correlations across

loans and systemic exposure to macroeconomic shocks.

2.2. Conditions new to this financial crisis

The crisis also had some features that were not familiar to past crises. These

include ever more sophisticated financial intermediaries and instruments; increased

interconnectedness, both nationally and internationally, among financial markets;

and a prominent role of household indebtedness. These new features played a criti-

cal role in the severity and breadth of the crisis, especially with respect to its trans-

mission and amplification, and complicated the policy responses.

Large reliance on wholesale and short-term funding in many advanced countries

and emerging markets created systemic fragility (Brunnermeier, 2009; Gorton,

2008, 2009). A relatively small shock quickly triggered severe liquidity shortages.

Adverse selection problems stemming from balance-sheet opaqueness led to the

freezing of interbank markets and initiated fire sales through a vicious deleveraging

process. The interconnectedness of wholesale-funding-dependent, highly leveraged,

at times under-regulated intermediaries amplified the problems and acted as trans-

mission mechanisms to the rest of domestic financial systems. A high degree of

financial integration, more than in the past, reflected in large cross-border gross

positions and a large presence of foreign intermediaries in several banking systems,

quickly transmitted financial shocks across borders through several channels.

Through direct exposures to US-originated assets and associated funding

problems, problems quickly spilled over to European banks, including in Germany

(IKB Deutsche Industriebank, July 2007) and France (BNP Paribas’s money market

fund, August 2007). As troubled intermediaries were forced to deleverage, the crisis

gradually spread to other markets through ‘common lender effects’, similar to

earlier crises (Kaminsky and Reinhart, 2000). Emerging markets – especially those

that had grown dependent on external financing – were affected through capital

account and bank funding pressures (Raddatz, 2009).

In some countries, the crisis was also the spark that triggered the unwinding of

large domestic imbalances. Booms that had been fuelled by a decade of benign

financial and macroeconomic conditions – notably, low interest rates and narrow

risk spreads – turned to busts. In the UK, after a prolonged real estate boom, mort-

gage lenders came under intense pressure beginning with a bank run on the whole-

sale-funding-dependent Northern Rock. Hard-hit were also Iceland, Hungary and

the Baltics, where imbalances were pronounced.

Financial conditions in the household sector played an unusually prominent role.

Most previous episodes of financial distress stemmed from problems in the official

sector (e.g., Latin America’s debt crisis of the 1980s) or the banking and corporate

274 STIJN CLAESSENS ET AL.

sectors (e.g., the East Asian crisis). This crisis, however, largely originated from

overextended households, in particular through mortgage loans (Figure 3). This

affected how the crisis was transmitted from the financial sector to the real sector.

A feedback loop of falling home values and disappearing credit set off a sharp

reduction in consumer spending, further worsening already difficult situations in the

real sector and (global) prospects. Cut-backs in consumption by households contin-

ued to bring about declines in corporate profitability with consequent lay-offs, and

increases in unemployment, creating further adverse feedback loops.

2.3. Grouping of countries

The progression of financial and economic events and the heterogeneity of financial

and trade exposures meant that various countries were affected at different points

in time by the crisis. Table 1 shows a timeline of the crisis and the order in which

countries entered into recession. Five groups of countries can be identified based on

the date they were affected by the crisis. The pattern that emerges differs from

what was observed in previous episodes of financial contagion. Similar to past epi-

sodes, first hit were countries with severe imbalances. However, these were not the

usual suspects (emerging markets typically are affected the earliest and the most).

Instead, advanced economies such as Ireland and Iceland were affected first. Next

were countries with strong financial links with the epicentre (the United States): key

financial centres and several Western European countries. Most emerging markets

were only affected later, when the collapse in global demand led to a contraction in

global trade.

We next give a more detailed overview of countries’ initial conditions and

developments with respect to asset prices, credit, current account, fiscal balance,

leverage, funding dependence, and international linkages before the crisis started

(mostly at the end of 2006).

Countries varied considerably in their domestic economic and financial condi-

tions prior to the crisis. Table 2 shows that countries affected first (Group 1) had

large domestic vulnerabilities. House price appreciation and credit growth in these

countries exceeded those in other groups greatly. Moreover, household leverage

(measured by mortgage-debt-to-GDP ratio) was higher in these countries and banks

were more dependent on wholesale funding than in the other groups. GDP growth,

on average, was higher in the group of countries first affected, suggesting the pres-

ence of booms. But current account deficits, not surprisingly, were also larger. No

large differences existed between groups in terms of fiscal balances.

In terms of a country’s international exposure to the crisis, we distinguish financial

and real linkages. For financial linkages, we use international bank claims as reported

by the Bank of International Settlements. In addition, we use measures of portfolio

investment flows and financial inflow/outflow restrictions (Schindler, 2009). For real

linkages, we use the ratio of the value of exports and imports combined to GDP.

GLOBAL LINKAGES AND GLOBAL POLICIES 275

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d
in
su

re
rs

A
M

B
A

C
a
n
d

M
B
IA

;
B
a
n
k

o
f
A

m
e
ri
c
a

a
c
q
u
ir
e
s

C
o
u
n
tr
y
w

id
e

F
in
a
n
c
ia

F
a
n
n
ie

M
a
e

a
n
d
F
re
d
d
ie
M
a
c

a
re

p
la

c
e
d

in
g
o
v
e
rn

m
e
n
t

c
o
n
se

rv
a
to

rs
h
ip

;
L
e
h
m

a
n

B
ro

th
e
rs

fi
le
s
fo
r
b
a
n
k
ru
p
tc

y
;
A

IG
g
e
ts

b
a
il
e
d

o
u
t;

S
E
C

is
su

e
s
a
n
e
m

e
rg

e
n
c
y

o
rd

e
r

te
m

p
o
ra

ri
ly

p
ro

h
ib

t
in

g
sh

o
rt

se
ll
in

g
;
F
E
D

e
x
p
a
n
d
s

sw
a
p

li
n
e
s
a
n
d
c
re
a
te

s
A

ss
e
t-

B
a
c
k
e
d

C
o
m

m
e
rc

ia
l

P
a

p
e
r

o
n

e
y

a
rk

e
t
M

u
tu

a
l

F
u
n
d

L
iq

u
id
it
y

F
a
c
il
it
y
;
G

o
ld

m
a
n

S
a
c
h
s

a
n
d

M
o
rg

a
n

S
ta

n
le

y
b
e

c
o
m

e
b
a
n
k

h
o
ld
in
g
c
o
m

p
a
n
ie

s;
JP

M
o
rg
a
n
C
h
a
se
a
c
q
u
ir
e
s

a
sh

in
g
to

n
M
u
tu

a
l.

F
E
D
c
re
a
te

s
C

o
m
m
e
rc
ia
l
P
a
p
e
r

F
u
n
d
in

g
F
a
c
il
it
y
,

o
n
e
y
M
a
rk

e
t
In

v
e
st
o
r

F
u
n
d
in
g
F
a
c
il
it
y
,
a
n
d

T
e
rm

A
ss
e
t-

B
a
c
k
e
d
S
e
c
u
ri
ti
e
s
L
e
n
d
in

g
F
a
c
il
it
y
;

W
e
ll
s

F
a
rg

o
a
c
q
u
ir
e
s

W
a
c
h
o
v
ia

;
F
D

IC
in

c
re
a
se

s
d
e
p
o
si
t

in
su

a
n
c
e

c
o
v

e
ra

g
e
;

T
re

a
su

ry
a
n
n
o
u
n
c
e
s

T
ro

u
b
le

d
A

ss
e
t

R
e
li
e
f
P
ro

g
ra

m
;

sw
a
p
li
n
e
s
a
re

e
x
p
a
n
d
e
d

fu
rt
h
e
r;

IM
F

a
n
n
o
u
n
c
e
s
a
sh

o
rt
-t
e
rm

li
q
u
id
it
y

fa
c
il
it
y
;

B
a
n
k
o
f
A
m
e
ri
c
a
a
c
q
u
ir
e
s

e
rr

il
l

L
y
n
c
h
.

P
u
b
li
c

su
p
p
o
rt

in
th

fi
n
a
n
c
ia

l
se

c
to

r
c
o
n
ti
n
u
e
s;

fi
sc

a
l
st
im

u
lu

s
p
a
c
k
a
g
e
s

a
re

p
u
t
in

to
a
c
ti
o
n
.

C
on

ti
n
u
ed

GLOBAL LINKAGES AND GLOBAL POLICIES 277

T
a
b
le

1
.

C
o
n
ti

n
u
e
d

2
0

0
7

2
0
0
8
2
0
0
9
Q
1
Q
2
Q
3
Q
4
Q
1
Q
2
Q
3
Q
4
Q
1

E
st
o
n
ia

F
ra

n
c
e

A
u
st
ri
a

A
rg

e
n
ti
n
a

C
y
p
ru

s
Ic

e
la

n
d

G
e
rm

a
n
y

C
h
il
e

A
u
st
ra

li
a

E
l
S
a
lv

a
d
o
r

Ir
e
la

n
d

H
o
n
g

K
o
n
g

C
ro

a
ti
a

B
e
lg

iu
m

S
lo

v
a
k

R
e
p
u
b
li
c

L
a
tv

ia
H

u
n
g
a
ry

D
e
n
m

a
rk

B
o
li
v
ia

U
k
ra

in
e

U
n
it
e
d

S
ta

te
s

It
a
ly

D
o
m

in
ic

a
n
R
e
p
u
b
li
c

B
ra

z
il

Ja
p
a
n

F
in

la
n
d

B
u
lg

a
ri
a

N
e
th

e
rl
a
n
d
s

L
it
h
u

a
n
ia

C
a
n
a
d
a

N
e
w

Z
e
a
la

n
d

L
u
x
e
m

b
o
u
rg

C
h
in

a
S
in

g
a
p
o
re

M
e
x
ic

o
C

o
lo

m
b
ia

T
h
a
il
a
n
d

M
o
ro

c
c
o

C
o
st
a

R
ic

a
T

u
rk

e
y

N
o
rw

a
y

C
z
e
c
h

R
e
p
u
b
li
c
U
n
it
e
d

K
in

g
d
o
m

P
o
rt
u
g
a
l

G
re

e
c
e
S
lo

v
e
n
ia

Is
ra

e
l

S
p
a
in

K
o
re

a
S
w

e
d
e
n

M
a
la

y
si
a

S
w

it
z
e
rl
a
n
d

P
e
ru

P
h
il
ip

p
in

e
s

P
o
la

n
d

R
o
m

a
n
ia

R
u
ss
ia

S
o
u
th

A
fr
ic

N
ot
e:

T
h
e

lo
w

e
r

p
a
n
e
l
sh

o
w

s
th

e
li
st

o
f
c

o
u
n
tr
ie

e
n
te

ri
n
g

in
to

e
c
e
ss

io
n

a
t
e
a
c
h

p
o
in

t
in

ti
m

e
.
R

e
c
e
ss

n
s

a
re

id
e
n
ti
fi
e
d

b
y

n
e
g
a

ti
v
e

re
a
l
G

D
P

g
ro

w
th

ra
te

.
S
ou

rc
es
:
F
e
d
e
ra

l
R
e
se
rv
e
B
o
a
rd

,
IM

F
In

te
rn

a
ti
o
n
a
l
F
in

a
n
c
ia

l
S
ta

ti
st
ic

s,
W

o
rl
d

E
c
o
n
o
m

ic
O

u
tl
o
o
k
,
a
u
th

o
rs

’
c
a
lc

u
la

ti
o
n
s.

278 STIJN CLAESSENS ET AL.

T
a
b
le

2
.

P
r
e
-c

r
is

is
c
o
n
d
it

io
n
s

o
u
se

p
ri
c
e

a
p
p
re

c
ia
ti
o
n

G
ro

w
th

in
b
a
n
k

c
re

d
it
–

to
-G

D
P
D
o
m

e
st
ic

c
re
d
it
–
to
-G
D
P

M
o
rt
g
a
g
e

d
e
b
t-

to
-G
D
P

h
o
le

sa
le

fu
n
d
in

g
d
e
p
e
n
d
e
n
c
e

G
ro
u
p

1
M

e
a
n

1
2
3
.6

0
6

4
.9

4
1

7
9

4
5

7
.2

4
)

0
.3

3
S
td

.
d
e
v
ia

ti
o
n

9
3

5
7

9
7

5
2

4
.3

5
.

G
ro
u
p

2
M

e
a
n

0
.8

6
3

1
3

2
.6

4
4

)
0
.3

5
S
td

.
d
e
v
ia
ti
o
n

4
1
.4

1
4

6
8

1
.0

0
.1

4
G

ro
u
p

3
M

e
a
n

4
4
.0

1
1

7
.0

9
1
1
1
.0

3
4
6
.5

4
)

0
.4

4
S
td

.
d
e
v
ia
ti
o
n

3
7

2
1

4
.7

5
5

2
.5

3
3

1
.2

0
.0

8
G

ro
u
p

4
M

e
a
n

5
0
.4

3
2

0
8
3
.6

2
2

3
.1

6
)

0
.5

0
S
td

.
d
e
v
ia
ti
o
n

3
.8

4
1
7
.0

3
5
8
.1

3
2
3
.1

0
0
.1

1
G

ro
u
p

5
M

e
a
n

7
5

5
8
.0

2
9

8
.2

3
1

6
.4

3
n
.a

.
S
td

.
d
e
v
ia
ti
o
n

6
7

5
1
0
.0

9
1
0
2
.4

4
1
8
.2

4
n
.a

.
G

ro
u
p

6
M

e
a
n

7
2

4
)

3
.4

2
8

0
.9

6
n
.a

.
)
0
.5

5
S
td
.
d
e
v
ia
ti
o
n

1
1
4
.6

3
1
3
.1

6
1

9
n
.a

.
0
.0

7
C
on
ti
n
u
ed

GLOBAL LINKAGES AND GLOBAL POLICIES 279

T
a
b
le
2
.
C
o
n
ti
n
u
e
d

F
is
c
a
l
b
a
la

n
c
e

u
rr

e
n
t
a
c
c
o
u
n
t
b
a
la

n
c
e

F
o
re

ig
n

b
a
n
k
c
la

im
s

T
ra

d
e

o
p
e
n
n
e
ss

L
o
g

p
e
r

c
a
p
it
a

in
c
o
m

e
G
ro
u
p
1
M
e
a
n

1
.8

9
)
1
4
.8

9
1
2
8
.1

8
1
0
8
.6

0
1

0
.1

9
S
td

.
d
e
v
ia
ti
o
n
3
.4

3
9

5
1
6
7
.2

5
6

3
0
.8

7
G

ro
u
p
2
M
e
a
n

)

0
.7

3
2
.4

4
1
0
4
.2

8
1
4
0
.8

4
1
0
.0

0
S
td
.
d
e
v
ia
ti
o
n
4
.3

0
9
.7

7
1

0
1
.7

7
1
4
0
.7

8
0
.8

0
G

ro
u
p
3
M
e
a
n
1
.8

0
1
.5

6
1
1
6
.3

9
1
0
2
.5

4
9

9
S
td
.
d
e
v
ia
ti
o
n

5
.4

2
8
.4

6
1
8
4
.6

0
6
2
.0

1
.1

0
G
ro
u
p
4
M
e
a
n
0
.1

2
0
.1

7
7

5
8
5
.3

2
9
.1

0
S
td
.
d
e
v
ia
ti
o
n

2
.8

3
8

2
1
1
2
.2

1
4
7
.4

4
0
.9

0
G
ro
u
p
5
M
e
a
n

)
2
.1

7
)
4
.7

7
n
.a

.
1
1
0
.8

8
8
.7

2
S
td

.
d
e
v
ia
ti
o
n
1
.1

0
2
.7

0
n
.a

.
4
2
.6

3
1
.0
8
G
ro
u
p
6
M
e
a
n

)
4
.9

3
)
1
.9

0
n
.a

.
7
2
.2

6
7
.8

8
S
td

.
d
e
v
ia
ti
o
n
3
.8

3
3
.0

3
n
.a

.
3
1
.7

0
.6

N
ot
es
:
C

o
u
n
tr
ie

s
a
re

a
ss

ig
n
e
d

g
ro

u
p
s

b
a
se

d
o
n

th
e
o
rd
e
r

th
e
y

e
n
te
re
d

re
c
e
ss

io
n
,
se

e
T

a
b
le

1
.
H

o
u
se
p
ri
c
e
a
p
p
re
c
ia
ti
o
n

is
th

e
c
u
m

u
la
ti
v
e

c
h
a
n
g
e

in
re

a
l
h
o
u
se

p
ri
c
e
s

b
e
tw
e
e
n

2
0
0
0

a
n
d

2
0
0
6
.

C
h
a
n
g
e

in
b
a
n
k
c
re

d
it
-t
o
-G

D
P

ra
ti
o

is
th

e
p
e
rc

e
n
ta

g
e
c
h
a
n
g
e

in
d
o
m

e
st
ic
c
re
d
it
to
th

e
p
ri
v
a
te

se
c
to

r
p
ro

v
id
e
d
b
y

b
a
n
k
s

e
x
p
re

ss
e
d

in
p
e
rc

e
n
t
o
f

G
D

P
b
e
tw

e
e
n
2
0
0
0
a
n
d

2
0
0
6

.
D

o
m
e
st
ic
c
re
d
it
-t
o
-G
D
P
is
th

c
o
u
n
tr
y
’s

ra
ti
o

o
f
d
o
m

e
st
ic
c
re
d
it

to
G

D
P

in
2
0
0
6
.

o
rt
g
a
g
e

d
e
b
t-
to

-G
D

P
ra

ti
o
is
th
e
ra
ti
o

o
f
o
u
ts
ta

n
d
in

g
m

o
rt
g
a
g
e

lo
a
n
s

to
G
D
P

in
2
0
0
6
.
W

h
o
le
sa
le
fu
n
d
in
g
d
e
p
e
n
d
e
n
c
e
is
th

e
n
e
g
a
ti
v
e

o
f
th
e

lo
g

o
f

re
ta

il
d
e
p
o
si
ts

d
iv

id
e
d

b
y

to
ta

l
li
a
b
il
it
ie

s
in
th
e

b
a
n
k
in

g
se

c
to

r,
se

e
R

a
d
d
a
tz

(2
0
0
9
)
fo

r
d
e
ta

il
s.

F
is
c
a
l
b
a
la
n
c
e

is
g
e
n
e
ra

l
g
o
v
e
rn

m
e
n
t
b
a
la

n
c
e

in
2
0
0
6
.
C

u
rr
e
n
t
a
c
c
o
u
n
t
b
a
la
n
c
e

is
e
x
p
re

ss
e
d
in
p
e
rc

e
n
t
o
f
G

D
P
a
n
d

is
a

o
f
2
0
0
6
.
F
o
re

ig
n
b
a
n
k
c
la
im
s
is
th

e
c
la

im
s

o
f
a

c
o
u
n
tr
y
’s
b
a
n
k
s
o
n

n
o
n
-r

e
si
d
e
n
ts
,
e
x
p
re

ss
e
d

in
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280 STIJN CLAESSENS ET AL.

The differences among the five groups of countries were less pronounced as

regards to their exposures to international conditions than they were in terms of

domestic conditions (Table 2). The exception is that countries in group 4 (typically

emerging markets) were clearly less integrated than countries in the first three

groups were. This raises the question whether some countries suffered more, not

because they were directly exposed to assets from or had close trade ties with the

crisis-origin countries, but because their home-grown imbalances made them more

vulnerable to the slightest shock in global financial and economic conditions.

3. PERFORMANCE DURING THE CRISIS

How did a country’s macroeconomic and financial performance during the crisis

depend on its initial conditions? In order to answer this, one first needs to consider

the most appropriate window over which performance should be measured. The

financial crisis timeline, from the US perspective (see Calomiris, 2009), was marked

clearly by the following events: the increase in subprime delinquency rates in the

spring of 2007, the ensuing liquidity crunch in late 2007, the liquidation of Bear

Stearns in March 2008, and the failure of Lehman Brothers in September 2008.

The resulting decline in economic activity came to full view in 2008, as the US

economy officially slipped into a recession following the peak in December 2007.

For the other countries, however, the timeline is less clear as there were at least

three main channels through which the shock propagated to other countries, with the

timeline for individual countries depending on the relative importance of each chan-

nel. First hit were the financial sectors of countries with direct financial exposures to

US assets, but this did not necessarily translate into lower macroeconomic activity

immediately. Next were countries that were vulnerable because of home-grown bub-

bles and dependency on external financing. Finally, small open economies with exten-

sive trade linkages and countries heavily reliant on exports suffered from the decline

in international trade and difficulty in financing trade. In most of these countries, the

domestic financial sector did not suffer because of direct exposure to the epicentre or

financial contagion, but was impacted by a decline in domestic economic activity.

Pooling all countries together and analysing the same set of crisis indicators over

the same time window may mask empirical regularities otherwise detectable in spe-

cific groups of countries affected at different points in time (which may explain the

findings of Rose and Spiegel, 2009a, b). For these reasons, economic growth in 2008

does not necessarily capture how a country was impacted by the crisis. For instance,

Bulgaria and Romania appear relatively unscathed if one only looks at growth in

2008. Yet, these countries fell into a deep recession, that is, they experienced a decline

in GDP, in 2009. The absolute level of GDP is, however, not necessarily the right

measure either for all countries. Even though economic activity slowed down severely,

several emerging market countries (for example, the Dominican Republic) continued

to post positive growth rates. Hence, multiple performance criteria are needed.

GLOBAL LINKAGES AND GLOBAL POLICIES 281

3.1. Macroeconomic performance

We consider three economic performance indicators: the duration of the recession

(if a decline in GDP happened); the severity of income loss following the crisis; and

the change in average growth rate in the crisis years compared to the pre-crisis per-

iod (more precisely: the change in average growth comparing 2003–2007 to 2008–

2009). Table 3 reports the averages and standard deviations of these three perfor-

mance indicators across the previously identified five different groups of countries

(columns 1–3). Since not all countries end up in recessions and some just saw a

drop in growth, we also report GDP growth rates for the years 2008 and 2009 (col-

umns 4–5). Table 3 shows that by all counts, Group 1 countries were the most

severely affected. Reflecting the diversity in financial and economic shocks, as well

as initial conditions, differences among the remaining groups are not very pro-

nounced, already suggesting it will be hard for any econometric analysis to detect

statistically significant relationships.

Table 4 reports the results of our more formal econometric tests, where we con-

trol for various factors using regressions. We find that only a few of the initial

conditions have statistically significant and robust relationships with our economic

performance measures. House price appreciation, bank credit growth prior to the

crisis, and size of the current account deficit are significant predictors for all three

performance indicators: the greater the house price appreciation and credit growth,

Table 3. Macroeconomic and financial sector performance during the crisis

Duration Severity Decline in
growth

Growth in
2008

Growth in
2009

FSI

Group 1 Mean 6.60 14.68 3.43 )6.11 )8.79 17.01
Std. deviation 1.14 7.85 1.76 4.61 6.09 –

Group 2 Mean 4.67 7.18 1.42 )2.92 )1.10 10.49
Std. deviation 0.98 3.04 0.51 1.58 2.56 5.47

Group 3 Mean 4.50 6.97 1.41 )0.73 )2.60 8.91
Std. deviation 1.46 5.40 1.10 2.16 5.86 4.13

Group 4 Mean 3.00 5.15 1.32 1.71 )1.02 9.34
Std. deviation 1.38 7.24 0.81 2.64 6.25 3.71

Group 5 Mean 3.50 6.76 1.74 2.53 )5.28 10.72
Std. deviation 1.00 5.54 1.27 0.51 5.81 –

Group 6 Mean n.a. )6.87 0.30 5.70 4.13 9.42
Std. deviation n.a. 2.69 0.64 2.44 2.52 2.16

Notes: Countries are assigned groups based on the order they entered recession, see Table 1. Duration is the
number of quarters through which real growth rate remains negative. Severity is the cumulative decline in
GDP from start of recession to end of recession. If recession is still under way, the end period is 2009Q4. If
the country is not in a recession as defined here, cumulative growth is calculated from 2008Q3 to 2009Q4.
Decline in growth is the decline in average growth from 2003–2007 to 2008–2009. Financial Stress Index
(FSI) summarizes seven indicators: banking sector beta, the TED spread, inverted term spread, stock market
return, stock market return volatility, sovereign debt spread, and exchange market volatility. Each variable is
demeaned using its arithmetic mean and divided by its standard deviation. The final index is the sum of these
standardized variables. The value shown is the maximum FSI during the

crisis.

Sources: IMF International Financial Statistics, World Economic Outlook, Bloomberg, WorldScope, authors’
calculations.

282 STIJN CLAESSENS ET AL.

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GLOBAL LINKAGES AND GLOBAL POLICIES 283

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284 STIJN CLAESSENS ET AL.

and the larger the current account deficit, the longer, the more severe, and the

more adverse the aggregate economic slowdown.

Trade openness (measured by exports plus imports to GDP) is positively associ-

ated with two out of our three economic performance measures (the severity and

relative adversity). Not surprisingly, economies that depend more on trade are more

vulnerable to global trade shocks. The drop in aggregate demand resulting from

the global financial crisis led to a dramatic decline in global trade, and naturally

those small open economies that depend on trade were most affected (Levchenko

et al., 2009).

The share of foreign bank claims is positively related to the duration of the

crisis, suggesting that countries with banks that have a disproportionally high

share of foreign claims outstanding are more vulnerable to global banking shocks

(though this relationship is only significant at the 10% level). Finally, recessions

do last longer in richer countries, reflecting the advanced-economy nature of this

crisis.

Neither financial sector development (the ratio of private credit to GDP) nor our

measures of mortgage market development and wholesale funding dependence are

significant for any of our economic performance measures. These findings suggest

that it is not so much the level of financial deepening or the structure of the finan-

cial system, but rather the occurrence of rapid increases in financial deepening

combined with sharp rises in asset prices that generates vulnerabilities, consistent

with other studies (e.g., Borio and Lowe, 2002). To the extent that credit booms

are followed by episodes of financial distress, their relationship with the duration of

the recessions is also consistent with the finding of Claessens et al. (2009) that credit

disruptions can be long lasting.

3.2 Financial sector performance

Table 3 also reports the Financial Stress Index (FSI), our main indicator of finan-

cial sector stress (column 6).
5

Specifically, it shows the peak in FSI minus its pre-

crisis level. For almost all countries, this peak is reached in October 2008. The

variation of the peak FSI between the five groups of countries is not as large as the

variation in macroeconomic performance. This could be because the financial

sector shock in this crisis was not only unusually large, but also very widespread.

5
This combines seven variables to capture various developments in financial markets. These variables are the banking sector

beta, the TED spread (the spread between T-Bill and ED, the ticker for Eurodollar futures contracts), the inverted term

spread, the stock market return, the stock market return volatility, the sovereign debt spread, and exchange market volatility.

Each variable is demeaned using its arithmetic mean and divided by its standard deviation. The final index is the sum of

these standardized variables. This equal-variance-weighted combination has the advantage that large fluctuations in one com-

ponent do not dominate the overall index. The additive feature also allows for a straightforward decomposition into contribu-

tions by sub-index. Dates of peaks and troughs of the index are robust to other weighting schemes, including, for example,

those based on principal components analysis. The index is available for 17 advanced and 28 emerging economies. See

further Cardarelli et al. (2009) and Balakrishnan et al. (2009) for definitions.

GLOBAL LINKAGES AND GLOBAL POLICIES 285

Hence, country-specific factors mattered little in terms of financial market indica-

tors. Obviously, this makes it harder to find econometrically significant relationships

at the cross-country level.

Table 5 reports the regression results that try to explain the financial sector

performance of individual countries. We find few variables to be statistically sig-

nificant, consistent with the general spread of the crisis. The ratio of private

credit to GDP is positively related to the increase in FSI, suggesting financial

stress was greater in economies with greater financial deepening. This result is

consistent with earlier findings by Kroszner et al. (2007) and Dell’Ariccia et al.

(2008a), who show that industries that depend on external financing are dispro-

portionately hurt when crises affect countries with deeper financial systems. The

reason, they argue, is simply that if banks are the key institutions allowing credit

constraints to be relaxed, then a sudden loss of these intermediaries in a system

in which such intermediaries are important should have a disproportionately con-

tractionary impact on the sectors that flourished due to their reliance on bank

financing.

Higher house price appreciation and more sizeable mortgage debt are associated

with greater increases in financial vulnerabilities. Trade openness appears to

reduce financial vulnerabilities, though the effect is only marginally significant.

Other variables, including the degree of wholesale funding, foreign bank exposure,

and fiscal and current account balances do not enter the regression results signifi-

cantly.

Overall, we find that most of our variables, including most notably credit growth,

reliance on wholesale funding, and foreign bank exposure are not significantly

related to our indicator of financial stress, confirming our prior that the financial

shock was of a systematic and global nature, affecting all financial markets more or

less equally. Most of the variation in financial distress appears related to the finan-

cial depth, not to measures of imbalances that had built up prior to the crisis (such

as excessive credit growth, fiscal imbalances or trade imbalances). Overall, our ini-

tial conditions indicators therefore do a better job in explaining the cross-country

variation in macroeconomic performance than the variation in financial sector

performance.

4. POLICY IMPLICATIONS

The crisis has exposed flaws in many policy frameworks. In particular, it has shown

the limits of traditional macroeconomic policy measures in dealing with deep reces-

sions associated with financial meltdowns. It has highlighted the shortcomings asso-

ciated with the lack of clear mechanism for the resolution of financial institutions

operating across borders. These flaws have reignited some old debates on whether

macroeconomic policy should deal with asset price booms and has highlighted that

286 STIJN CLAESSENS ET AL.

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GLOBAL LINKAGES AND GLOBAL POLICIES 287

national and international financial architectures had fallen behind rapidly integrat-

ing financial systems.

We stress upfront that many elements of the macroeconomic and regulatory

frameworks remain valid. Surely stable inflation and sustainable public accounts

remain important goals. And while improvements in micro-prudential regulations

are needed to reduce financial markets’ procyclicality, rules calling for well-capital-

ized and transparent banks adhering to sound corporate governance and account-

ing standards remain valid. At the international level, the answer is certainly not a

repeal of financial integration, but rather a call for greater coordination across

regulators and clearer rules for cross-border resolution.

Yet, the crisis has shown that dangerous vulnerabilities can brew under a seem-

ingly calm macroeconomic surface with low inflation and stable output gap. In that

context, progress has to be made on how to assess vulnerabilities in asset and credit

markets and incorporate them into macroeconomic and regulatory policies. The

evidence in this and other papers suggest that greater monitoring of housing and

credit markets may be a good start. Progress also has to be made with respect to

the international financial architecture. Regulators have been discussing the impor-

tance of information sharing and coordinated responses to financial markets stress

in the context of cross-border supervision issues. Hence, the broad reform agenda

for the future that we touch upon in this section focuses on these two dimensions.

Finally, an important caveat: while there are lessons for macroeconomic policy

and financial regulations, there remain many areas of unknowns where further pol-

icy research would be useful. These include areas such as competition policy for a

stable financial system, approaches to consumer protection in financial services, and

how to address the political economy pressures regarding financial deregulation,

financial openness, and financial crises.

4.1. Macroeconomic policy lessons

A first, although not completely new lesson on the macroeconomic front is that

asset price booms and excessive credit growth can lead to severe macroeconomic

vulnerabilities. This concern has reopened the debate on whether monetary policy

should react to asset price booms and increases in leverage.
6

However, this may be

the wrong way of approaching the problem. The monetary policy rate is at best a

blunt instrument to deal with asset price bubbles and credit booms.
7

First, a higher

policy rate is unlikely to be able to discourage speculative behaviour and even if it

were effective, it would likely have large macroeconomic costs (through deviations

from the desired inflation and output gap). Other, more targeted, regulatory instru-

ments could be used. Higher capital ratios can reduce leverage and excessive credit

6
For a more detailed review, see IMF (2009a).

7
See Blanchard et al. (2010).

288 STIJN CLAESSENS ET AL.

growth; lower limits on loan-to-value ratios can dampen house price appreciation;

and higher margin requirements can help limit stock price increases. While these

tools can be to some extent circumvented, they are likely to have lower macro costs

than outright changes in the monetary policy rate. These instruments can also com-

plement monetary policy to the extent that low interest rates lead to excessive lever-

age or to excessive risk taking.
8

A second (but not new) lesson on the macroeconomic front is the importance of

overall sound macroeconomic conditions. Economies are better able to absorb

shocks and grow out of a crisis when they run current account surpluses and have

the ‘fiscal space’ to run larger fiscal deficits when needed.

4.2. Reform of the national and international financial architectures9

Financial liberalization has led to financial deepening and increasingly globally inte-

grated financial systems. While the benefits of such liberalization for long-run

growth are evident (see IMF, 2008a), our results raise questions about the dangers

of rapid liberalization for financial stability and the ability for the financial system

to absorb negative financial shocks in the short run. Indeed, several of the countries

that experienced fast credit growth and sharp increases in asset prices did so in the

context of accelerated financial liberalization.

Financial liberalization combined with the existence of underpriced deposit insur-

ance and implicit government guarantees might have generated incentives for finan-

cial actors to take excessive risks. And financial innovation, such as asset

securitization, may have greatly enhanced the ability of financial actors to do so.

Given that financial markets will not internalize all the cost of such risk taking

behaviour, the government might need to intervene to curtail such risk taking

behaviour.

Traditionally, such regulations have come mainly in the form of capital require-

ments and activity restrictions. What the crisis has made evident is that the current

regulatory and supervisory apparatus does not adequately incorporate the notion of

systemic risk. Going forward, the financial system should be regulated such that the

build-up of systemic risk is mitigated.

The crisis has also made clear the enormous costs of not identifying the build-up

of risks early enough. This requires a macro-prudential approach combined with

enhanced market discipline. Private market discipline failed in many respects, while

public surveillance identified risks at a broad level but did not drill down deep

enough to expose the full extent of vulnerabilities or draw specific policy conclu-

sions.

8
See, for instance, Jiménez et al. (2007) for the impact of monetary policy on risk taking.

9
For more detailed reviews of needed financial architecture reforms, see IMF (2009b, c), Brunnermeier et al. (2009), New

York University (2009), and United Nations (2009).

GLOBAL LINKAGES AND GLOBAL POLICIES 289

Improving regulations and supervisory structures at a national level is, however,

not sufficient given the increasing importance of cross-border activities and globally

integrated financial systems. Many international financial architecture changes are

needed to monitor and manage the build-up of global systemic risk.
10

A more effec-

tive approach to detect impending dangers to the world economy will require close

cooperation among international agencies to bring together the scatter of macro-

financial information and expertise, and identify key risks and vulnerabilities. An

improvement in the assessment of risks also means strengthening macro-financial

analysis and early warning systems. Most important will be to find better ways to

convince country authorities to take actions to deal with vulnerabilities, particularly

during good times.

Better cross-border crisis management arrangements are also sorely needed. As

clearly demonstrated by the failures of Lehman Brothers, some Icelandic banks,

and other cross-border banks, countries cannot deal with large, complex, globally

active financial institutions on their own, as these institutions affect many markets

and countries. Closer cooperation and greater coordination among regulators and

supervisors can help to adequately address market disruptions as they arise and

forestall policy measures that have adverse spillovers. Improvements are also needed

in the area of cross-border banking resolution (Claessens, 2010). Importantly,

improved crisis management will require better international liquidity provision, to

both financial institutions and countries, to prevent spillovers from becoming sol-

vency issues.

Finally, but importantly, the crisis has made clear that a greater coordination

between macroeconomic and regulatory policy is needed. Prudential regulation

should not only acquire a more macro, system-wide, dimension, but regulatory pol-

icy should be set in combination with macroeconomic policy such that the goal of

financial stability does not conflict with the macroeconomic goals of economic

growth, price stability and full employment.

Panel discussion

Cedric Tille opened the discussion and focused on the responsibility of banks to

consumers. He believed that stricter responsibilities should be placed on the banks

in ensuring a consumer’s ability to repay before lending.

A number of panellists focused on the role corporate governance played in deter-

mining banks’ performance during the crisis. Richard Portes asked if there was any

evidence to support the argument that banks with large block shareholdings were

more successful. George de Ménil noted that in France the view was that block

10
For a more detailed review of needed financial reforms, see IMF (2009c).

290 STIJN CLAESSENS ET AL.

shareholding forced the bank CEOs to communicate with shareholders and act

responsibly. Marco Pagano referred to empirical findings that did not find a signifi-

cant positive relationship between several measures of corporate governance and

banks’ performance.

Richard Portes suggested that central banks should focus on other indicators and

not just leverage ratios. He highlighted that leverage in the top 18 banks in the US

was higher in summer 1998 than in summer 2007 while the deleveraging was

greater in autumn 1998. However, the effect on the real economy was far greater

after the more recent deleveraging experience which therefore cast doubt on the

information content of leverage ratios. Additional indicators such as loan-to-value

(LTV) ratios and countercyclical capital adequacy ratios could also be used by cen-

tral banks.

In response to Richard Portes’ comments, Stijn Claessens agreed that additional

indicators should be taken into consideration but the challenge was to first design

the framework regarding the application of the indicators. Given the lack of under-

standing in what caused many crises and to limit the consequences, he argued that

it will be difficult to design the rule book. He preferred to see an approach stressing

the role of the regulation authority and its mandate. Past experience on the length

of time it took for the establishment of effective central bank independence would

suggest that a long time horizon would be needed for the development of a regula-

tory framework. In response to Bas Jacobs’ comments, Stijn Claessens mentioned

that political economy pressures and bureaucratic failures also contributed to gov-

ernments’ failures in handling the crisis. He felt that a move towards regulatory

independence would also help overcome these failures. Stijn Claessens thought that

moral hazard had increased given the number of banks that were bailed out. He

believed that little progress had been made in terms of designing and introducing

new regulatory rules. He noted that this is particularly true in the US where despite

public pressure and a change in government little action had been taken.

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GLOBAL LINKAGES AND GLOBAL POLICIES 293

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The financial crisis of 2007–2008 is rooted in a number of factors, some common to previous financial crises, others new. Analysis of post-crisis macroeconomic and financial sector performance for 58 advanced countries and emerging markets shows a differential impact of old and new factors. Factors common to other crises, like asset price bubbles and current account deficits, help to explain cross-country differences in the severity of real economic impacts. New factors, such as increased financial integration and dependence on wholesale funding, help to account for the amplification and global spread of the financial crisis. Our findings point to vulnerabilities to be monitored and areas of needed national and international reforms to reduce risk of future crises and cross-border spillovers. They also reinforce a (sad) state of knowledge: much of how crises start and spread remains unknown. [

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Subject

Studies

;

Economic crisis

;

Manycountries

;

Macroeconomics

;

Economic impact

Classification

9130: Experimental/theoretical

1130: Economic theory

Title

Cross-country experiences and policy implications from the global financial crisis

Author

Claessens, Stijn
;
Dell’Ariccia, Giovanni
;
Igan, Deniz
;
Laeven, Luc

Publication title

Economic Policy

Volume

Issue

Pages

267-293

Publication year

2010

Publication date

Apr 2010

Year

2010

Publisher

Blackwell Publishing Ltd.

Place of publication

Oxford

Country of publication

United Kingdom

Publication subject

Business And Economics

ISSN

02664658

Source type

Scholarly Journals

Language of publication

English

Document type

Feature

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http://dx.doi.org.libproxy.edmc.edu/10.1111/j.1468-0327.2010.00244.x

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195310226

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