Financial Stress, Downturns, and Recoveries

Author/Editor:

Subir Lall ; Roberto Cardarelli ; Selim Elekdag

Publication Date:

May 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress-in particular banking distress-on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Economies with more arms-length financial systems appear to be particularly vulnerable to sharp contractions, due to the greater procyclicality of leverage in their banking systems.

Series:

Working Paper No. 09/100

Subject:

Frequency:

Biannually

English

Publication Date:

May 1, 2009

ISBN/ISSN:

9781451872477/1018-5941

Stock No:

WPIEA2009100

Format:

Paper

Pages:

58

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