## Financial Stress, Downturns, and Recoveries

_IMF Working Papers, May 1, 2009_

## Source details

**Canonical URL:** [Financial Stress, Downturns, and Recoveries](https://www.imf.org/en/publications/wp/issues/2016/12/31/financial-stress-downturns-and-recoveries-22923)

## Other formats

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## Bibliographic details
- Authors: Subir Lall, Roberto Cardarelli, Selim A Elekdag
- Published: May 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872477.001

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### Summary
- The paper examines why some financial stress episodes lead to economic downturns.
- Episodes of financial turmoil are identified using a financial stress index (FSI).
- An analytical framework is proposed to assess the impact of financial stress— in particular banking distress— on the real economy.
- The paper concludes:
  - 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.

### Analytical framework and methodology
- Identification of turmoil episodes: uses a financial stress index (FSI).
- Focus of analysis: the transmission of financial stress, with particular attention to banking distress, to real economic activity.

### Key findings
- Banking distress versus other market stress:
  - Banking distress → higher likelihood of severe and protracted economic downturns.
  - Stress concentrated in securities or foreign exchange markets → less likely to produce similarly severe/protracted downturns.
- Financial system structure:
  - Economies with more arms-length financial systems → greater vulnerability to sharp contractions.
  - Mechanism identified: greater procyclicality of leverage in banking systems in arms-length financial systems.

### Subject areas and keywords
- Subject: Asset prices, Banking, Currency markets, Economic recession, Financial crises
- Keywords: asset price, banking system, cost of capital, monetary policy, stress episode, WP

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## Content in this bundle

- **_wp09100 - Executive Summary**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/financial-stress-downturns-and-recoveries-22923_