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The Cross-Country Incidence of the Global Crisis

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Abstract

We examine whether the cross-country incidence and severity of the 2008–09 global recession is systematically related to precrisis macroeconomic and financial factors. We find that the precrisis level of development, increases in the ratio of private credit to GDP, current account deficits, and openness to trade are helpful in understanding the intensity of the crisis. International risk sharing did little to shield domestic demand from the country-specific component of output declines, while those countries with large pre-crisis current account deficits saw domestic demand fall by much more than domestic output during the crisis.

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Notes

  1. Empirical work by Acharya, Schnabl, and Suarez (2009) documents how banks more exposed to these assets experienced larger losses. However, Kamin and Pounder DeMarco (2010) find little evidence that countries that held large amounts of U.S. mortgage-backed securities and were highly dependent on dollar funding experienced greater financial distress during the crisis.

  2. Berglof and others (2009) focus on the factors explaining the incidence of the crisis on the region.

  3. These findings clearly depend on the chosen definition of the crisis period (2008–09). In these countries, growth until mid-2008 was sustained by record-high oil and commodity prices.

  4. The decline in private consumption is generally more modest than the decline in output and demand, while the decline in investment is larger.

  5. This may help explain the finding of Rose and Spiegel (2010b) who fail to uncover any statistically significant link between bilateral trade and financial linkages with the United States and the intensity of the crisis. We also experimented with a variety of controls for bilateral financial and trade linkages vis-à-vis the United States in our statistical analysis, but find little evidence of a statistically significant relation between these linkages and the intensity of the crisis.

  6. The variable short-term debt at remaining maturity over reserves is not available for advanced economies. Although it is possible to construct a short-term debt series (albeit not at remaining maturity) for these economies, its median level as a ratio of reserves (2,600 percent) is a large multiple of the one for emerging and developing countries (24 percent), hindering a proper comparison of this variable between crisis and noncrisis samples.

  7. At end-2007, the sum of financial assets and liabilities in Luxembourg was over 200 times GDP.

  8. The first group includes Bahrain, Belgium, Cyprus, Iceland, Ireland, Liberia, Luxembourg, Malta, the Netherlands, Hong Kong S.A.R., Singapore, Switzerland, and the United Kingdom. The second includes Belize, Mauritius, Panama, Samoa, Seychelles, St. Vincent and the Grenadines, and Vanuatu.

  9. We also experimented with the inclusion of the net foreign asset position, as discussed in the subsection on robustness.

  10. Recent examples include Kose, Prasad, and Terrones (2009a and 2009b).

  11. Furthermore, we exclude Luxembourg from all the regressions, given the very extreme level of IFI for this country, as well as Equatorial Guinea, for overall problems with data quality.

  12. The correlation of “trend” growth with growth during 2005–07 is in general positive and strong.

  13. This evidence is somewhat stronger statistically when oil exporters are excluded—these countries had stronger growth during 2008–09 and tend to have a pegged exchange rate regime.

  14. It is unfortunately not possible to construct a reliable measure of bilateral financial linkages for such a large sample of countries. Note also that many available measures of bilateral financial linkages rely on residence-based statistics (the residence principle being the one adopted for the balance of payments). As a result, these statistics overstate considerably the importance of financial centers as financial trading partners, and fail to capture linkages that can occur through bank affiliate entities that are resident in one country but belong to a banking group from a different country.

  15. Our regressions are reduced form. The policy response may also operate by affecting the coefficients on the precrisis variables to the extent that policy responds systematically to the values of these precrisis variables.

  16. International Monetary Fund (2010) finds the ratio of reserves to short-term debt plus the current account deficit to be significantly and positively correlated with the change in real output between peak and trough for emerging markets during the crisis.

  17. It is worthwhile to highlight that this specification is fundamentally different to those explored in the previous section. In Tables 6, 7, 8 and 9, the goal was to investigate the co-movement between precrisis variables and output or demand growth during the crisis. In contrast, the goal in this section is to investigate the comovement between output growth during the crisis and consumption growth or demand growth during the crisis, controlling and interacting for a set of initial conditions in relation to financial integration and creditworthiness.

  18. We use a threshold of −50 percent of GDP for the net external position, so as to avoid counting as highly financially integrated those countries that have large net external liabilities as a ratio of GDP. We discretize the IFI variable, since we do not consider that the crude measure of the gross scale of the international balance sheet affects risk sharing in a linear fashion. Rather, in this case, we simply seek to make a distinction between “more financially integrated” and “less financially integrated” economies.

  19. We also ran the “perfect risk sharing” equation by which the cross-country variation in consumption growth should be proportionate to real exchange rate dynamics: however, the pattern is that faster consumption growth is associated with real appreciation, in violation of the benchmark hypothesis.

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Additional information

*Revised version of the paper prepared for the IMF/BOP/PSE Conference “Economic Linkages, Spillovers and the Financial Crisis,” Paris, January 28–29, 2010. E-mails: plane@tcd.ie, gmilesiferretti@imf.org. We thank Giancarlo Corsetti, Pierre-Olivier Gourinchas, Ayhan Kose, Andy Rose, Nelson Souza-Sobrinho, Mark Spiegel, two anonymous referees, and participants to the Paris conference and to the XII Workshop in International Economics and Finance in Rio de Janeiro for comments and suggestions. We are grateful to John Kowalski, Barbara Pels, and Donal Mullins for helpful research assistance.

Appendix

Appendix

List of Economies

AlbaniaAlgeriaAngolaAntigua and BarbudaArgentinaArmeniaAustraliaAustriaAzerbaijanBahrainBangladeshBelarusBelgiumBelizeBeninBhutanBoliviaBosnia and HerzegovinaBotswanaBrazilBrunei DarussalamBulgariaBurkina FasoBurundiCambodiaCameroonCanadaCape VerdeCentral African Rep.ChadChileChina,P.R.: MainlandColombiaComorosCongo, Dem. Rep. ofCongo, Republic ofCosta RicaCôte d'IvoireCountryCroatiaCyprusCzech RepublicDenmarkDjiboutiDominicaDominican RepublicEcuadorEgyptEl SalvadorEquatorial Guinea1EritreaEstoniaEthiopiaFijiFinlandFranceGabonGambia, TheGeorgiaGermanyGhanaGreeceGrenadaGuatemalaGuineaGuinea-BissauGuyanaHaitiHondurasHong Kong S.A.R. of ChinaHungaryIcelandIndiaIndonesiaIran, Islamic Republic ofIrelandIsraelItalyJamaicaJapanJordanKazakhstanKenyaKiribatiKoreaKuwaitKyrgyz RepublicLaosLatviaLebanonLesothoLiberiaLibyaLithuaniaLuxembourg1MacedoniaMadagascarMalawiMalaysiaMaldivesMaliMaltaMauritaniaMauritiusMexicoMoldovaMongoliaMoroccoMozambiqueMyanmarNamibiaNepalNetherlandsNew ZealandNicaraguaNigerNigeriaNorwayOmanPakistanPanamaPapua New GuineaParaguayPeruPhilippinesPolandPortugalQatarRomaniaRussiaRwandaSamoaSão Tomé & PríncipeSaudi ArabiaSenegalSerbiaSeychellesSierra LeoneSingaporeSlovak RepublicSloveniaSolomon IslandsSouth AfricaSpainSri LankaSt. Kitts and NevisSt. LuciaSt. Vincent & Gr.SudanSwazilandSwedenSwitzerlandSyriaTaiwan Province of ChinaTajikistanTanzaniaThailandTogoTongaTrinidad & TobagoTunisiaTurkeyTurkmenistanUgandaUkraineUn. Arab EmiratesUnited KingdomUnited StatesUruguayUzbekistanVanuatuVenezuelaVietnamYemenZambiaZimbabwe____________________________________________________1Excluded from the regressions presented in Tables 6–11.

Data Definitions and Sources

GDP and domestic demand variables: IMF, World Economic Outlook database, April 2010.

Trade openness: Sum of imports and exports of goods and services over GDP. Source: IMF, World Economic Outlook.

Manufacturing share: Share of manufacturing output in total output. Source: United Nations.

Private Credit/GDP and change in private credit/GDP: World Bank Financial Structure database (Beck, Demirgüç-Kunt and Levine, 2000; Beck and Demirgüç-Kunt, 2009) and authors’ calculations based on IMF, International Financial Statistics.

Financial openness: Sum of external assets and liabilities over GDP. Source: Lane and Milesi-Ferretti, External Wealth of Nations database.

Output volatility: Standard deviation of output growth over the period 1990–2007 (1995–2007 for some countries in Central and Eastern Europe and the former Soviet Union).

Debt/GDP (gross): Sum of debt assets (including reserves) and liabilities divided by GDP, 2007. Source: Lane and Milesi-Ferretti, External Wealth of Nations database.

Net Debt/GDP: difference between debt assets (including reserves) and debt liabilities, divided by GDP, 2007. Source: Lane and Milesi-Ferretti, External Wealth of Nations database.

NFA/GDP: Net foreign asset position divided by GDP, 2007. Source: Lane and Milesi-Ferretti, External Wealth of Nations database.

BIS net/GDP: Net position vis-à-vis BIS-reporting banks, December 2007. Source: BIS, locational banking statistics.

Trade with US/GDP: Exports plus imports vis-à-vis the United States. Source: United States Bureau of Economic Analysis.

De facto peg: dummy variable taking the value of 1 for countries with a de facto pegged exchange rate regime in 2007 and zero otherwise. Source: International Monetary Fund, Annual Report on Exchange Rate Arrangements and Exchange Restrictions.

Intermediate exchange rate regime: dummy variable taking the value of 1 for countries with a de facto intermediate exchange rate regime in 2007 and zero otherwise. Source: International Monetary Fund, Annual Report on Exchange Rate Arrangements and Exchange Restrictions.

Foreign exchange reserves: Source: IMF, International Financial Statistics.

Short-term debt: Sources: IMF, World Economic Outlook database (emerging and developing countries) and BIS-IMF-World Bank “debt hub” database (advanced economies).

Short-term debt, remaining maturity: Sources: IMF, World Economic Outlook database.

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Lane, P., Milesi-Ferretti, G. The Cross-Country Incidence of the Global Crisis. IMF Econ Rev 59, 77–110 (2011). https://doi.org/10.1057/imfer.2010.12

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