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    International Financial Integration and Crisis Intensity

    Rose, Andrew K. | January 2012
    Abstract
    This paper analyzes the causes of the 2008–2009 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. The analysis is conducted on a cross-section of 85 economies; I focus on international financial linkages that may have both allowed the crisis to spread across economies, and/or provided insurance. The model of the cross-economy incidence of the crisis combines 2008–2009 changes in real gross domestic product (GDP), the stock market, economy credit ratings, and the exchange rate. The key domestic determinants of crisis incidence that I consider are taken from the literature, and are measured in 2006: real GDP per capita; the degree of credit market regulation; and the current account, measured as a fraction of GDP. Above and beyond these three national sources of crisis vulnerability, I add a number of measures of both multilateral and bilateral financial linkages to investigate the effects of international financial integration on crisis incidence. I ask three questions, with a special focus on Asian economies. First, did the degree of an economy’s multilateral financial integration help explain its crisis? Second, what about the strength of its bilateral financial ties with the United States and the key Asian economics of the People’s Republic of China, Japan, and the Republic of Korea? Third, did the presence of a bilateral swap line with the Federal Reserve affect the intensity of an economy’s crisis? I find that neither multilateral financial integration nor the existence of a Fed swap line is correlated with the cross-economy incidence of the crisis. There is mild evidence that economies with stronger bilateral financial ties to the United States (but not the large Asian economies) experienced milder crises. That is, more financially integrated economies do not seem to have suffered more during the most serious macroeconomic crisis in decades. This strengthens the case for international financial integration; if the costs of international financial integration were not great during the Great Recession, when could we ever expect them to be larger?
    Citation
    Rose, Andrew K.. 2012. International Financial Integration and Crisis Intensity. © Asian Development Bank Institute. http://hdl.handle.net/11540/1106. License: CC BY-NC-ND 3.0 IGO.
    Keywords
    Financial Stability
    Financial Management System
    Financial Restructuring
    Capital Market Development
    Erosion
    Market Development
    Economics
    Erosion
    International Economics
    International Financial Market
    Multilateral Financial Institutions
    Economic Recession
    Market
    Crisis
    Business recessions
    Multilateral development banks
    Regulatory reform
    Capital
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    Citable URI
    http://hdl.handle.net/11540/1106
    Metadata
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    Author
    Rose, Andrew K.
    Theme
    Finance
    Economics
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise