The Global Financial Crisis - Explaining Cross-Country Differences in the Output Impact
IMF Working Papers, December 1, 2009
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Bibliographic details
- Authors: Gaston Gelos, Robert Rennhack, James P Walsh, Pelin Berkmen
- Published: December 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874259.001
Summary of purpose and approach
- One of the first attempts to explain differences in the crisis impact across developing countries and emerging markets.
- Uses cross-country regressions to explain factors driving growth forecast revisions after the eruption of the global crisis.
- Finds that a small set of variables explain a large share of the variation in growth revisions.
Key empirical findings
- Financial sector characteristics:
- Countries with more leveraged domestic financial systems tended to suffer larger downward revisions to their growth outlooks.
- Countries with more rapid credit growth tended to suffer larger downward revisions to their growth outlooks.
- For emerging markets, the financial channel trumps the trade channel.
- Trade channel:
- For a broader set of developing countries, the trade channel appears important.
- Countries exporting more advanced manufacturing goods were more affected than those exporting food.
- Exchange-rate flexibility:
- Exchange-rate flexibility clearly helped in buffering the impact of the shock.
- Fiscal position:
- There is some—weaker—evidence that countries with a stronger fiscal position prior to the crisis were hit less severely.
- Other policy variables:
- Little evidence for the importance of other policy variables.
Methodological note
- Analysis based on cross-country regressions explaining growth forecast revisions following the global financial crisis.
Policy implications and interpretation
- Strengthening financial-sector resilience and monitoring credit growth are critical to reduce vulnerability to global shocks, especially for emerging markets where the financial channel dominated.
- Exchange-rate flexibility can act as an effective shock absorber.
- Fiscal strength prior to a shock may provide some protection, though evidence is weaker.
- Trade composition matters for developing countries: reliance on advanced manufacturing exports increased exposure compared with food exporters.
ByGaston Gelos, Robert Rennhack, James P Walsh, Pelin Berkmen December 1, 2009