March 04, 2010
The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact
From "The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact," IMF WP 09/280, by Pelin Berkmen, Gaston Gelos, Robert Rennhack, and James P. Walsh:
We provide one of the first attempts at explaining the differences in the crisis impact across developing countries and emerging markets. Using cross-country regressions to explain the factors driving growth forecast revisions after the eruption of the global crisis, we find that a small set of variables explain a large share of the variation in growth revisions. ...
... Countries with more leveraged domestic financial systems and more rapid credit growth tended to suffer larger downward revisions to their growth outlooks. For emerging markets, this financial channel trumps the trade channel. For a broader set of developing countries, however, the trade channel seems to have mattered, with countries exporting more advanced manufacturing goods more affected than those exporting food. Exchange-rate flexibility clearly helped in buffering the impact of the shock. There is also some -- weaker -- evidence that countries with a stronger fiscal position prior to the crisis were hit less severely. We find little evidence for the importance of other policy variables.
For the emerging market economies, a decomposition of effects attributes the largest proportion to "leverage"; this is true even for the top quartile in terms of growth revisions.
Figure from "The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact," IMF WP 09/280, p.13.
The authors conclude with some preliminary policy lessons:
- Exchange-rate flexibility is crucial to dampen the impact of large shocks;
- Prudential regulation and supervision needs to aim at preventing the types of build up of vulnerabilities which are particularly associated with credit booms;
- A solid fiscal position during ‘good times’ creates some buffers to conduct countercyclical fiscal policies during shocks.
Posted by Menzie Chinn at March 4, 2010 11:15 AMdigg this | reddit
"A solid fiscal position during ‘good times’ creates some buffers to conduct countercyclical fiscal policies during shocks."
I have some serious doubts that this will ever occur--and as critics of Keynes usually forget is that he recommended saving during the good times for government intervention in the bad times, that is, stimulus wouldn't and really shouldn't come from borrowed money, but previously saved money.
However, what's ultimately disappointing about the authors conclusions is that once again economists are ignoring the dangers of allowing the Credit Default Swap market to continue, or at the very least to have them qualified legally as insurance and not as a swap; although it should just be banned all together. Further, the pricing model is not based on credit risk but market volatility, thus, credit risk is not properly gauged by the market or anyone for that matter that simply goes on the CDS rates.
As far as the United States is concerned about having money to bolster the economy during the bad times that answer is more straightforward: stop bailing out failed institutions, waging unnecessary wars, militarizing foreign and energy policies, and incurring huge and unnecessary interests cost to pay for the previous mentioned actions.
Posted by: Brian at March 4, 2010 06:35 PM
The study is more comprehensive on the aftermath of the crisis than on the causes.
Primary fiscal deficits do matter, current accounts as well.
Difficult role to be the bankers of the rest of the world ( Banks leverage call for banks adequate capital and the right allocation of these resources)
Intra trade on Food and beverages faring better than manufacturing.
Flexible exchange rate is a cushion (as long as countries have something to sell,as imports may be anyway contained through lack of credit. Devaluation is always a way out but temporary)
Prices formation is not part of the scope of studies (effects of derivatives on pricing)
Currencies mismatching in loans not touched upon (beneficiaries funding real estates loans in FC etc..)
Percentage of consumers credit vs GDP,real estates loans/GDP,leverages in corporate deals and pricing through derivatives.
Role of Central banks supervision and all multiple layers of multinational bodies dealing with above subject.
Those above reasons are still making me at odd with the Latin proverb "Margaritas ante porcos"
Posted by: ppcm at March 5, 2010 05:27 AM
Seems to me financial fraud must play a role somehow. This was once considered the forte of emerging countries, but the developed world has successfully turned the tables.
Now that the news is out that Goldman has been doing the Greek Gods work too, Euro government intelligence agencies(once preoccupied with the Cold War, The Axis of Evil, Terrorism, etc..) have now focused on short sellers of questionable sovereign debt and dumping of the associated CDS insurance contracts.
Much as I hate the fact that the CDS was written in the first place, it is now known that Greece has a huge amount of off balance sheet debt which it hid so it could borrow more, and profitable CDS was written and sold before this little know fact became part of the public domain. There are many, many more countries who are also guilty of this slight of hand. (CDS for all of it too, and we still have too-big-to-fail)
So the focus now is get the sellers, and short sellers. Fraudulent government finances are not the problem. (maybe ?!?!)
In support of the authors conclusions, there does seem to be significant correlation between counties that got punished by IMF induced austerity in the past(Asian Tigers)or other internal reform like Sweden's bank nationalization, or Germany's decade long drive for increased productivity, and how well they are weathering the current downturn.
Note that the IMF never talks about stimulus programs when they go in and "fix" countries. So maybe the new way that the PIIGS, Britain, Japan and the US may adopt is to make investor selling of now risky government debt a crime punishable with jailtime.
It may take strong measures to preserve Freedom, Democracy, and essential government services!
Posted by: Cedric Regula at March 5, 2010 11:00 AM
Horray! Berkmen, Gelos, Rennhack, and Walsh have quantified the obvious: When the miscreants go bankrupt, you lose less if you have saved your money, traded fairly, and have payed your bills.
Posted by: MarkS at March 5, 2010 03:37 PM
Cedric: good points. Reading your post, I couldn't help but think of the recent movie release Avatar.
Yes, Avatar can be viewed as an interesting indictment of violent colonialism. But the story's writers got it wrong; contemporary multi-national resource companies do not abuse indigenous peoples, governments do.
Perhaps finger-pointing the companies works because without their technology and expertise, the projects would not go forward and because sometime in the distant past, we can actually find several examples of misbehaving corporations. Of course nobody repeats the stories of how the Anglo-America and De Beers mining companies helped nudge Aparatheid system out of the way.
Posted by: GNP at March 5, 2010 03:43 PM
Here's an interesting piece by Darrell Duffie of Stanford University from 2007 on credit risk transfer.
Posted by: Brian at March 6, 2010 02:32 AM
I saw Avatar too, and the CGI work was impressive, but I recognized the theme from countless other genres over the years, and it is getting a little trite. Besides, Alien did it better in the sci-fi "space".
I think the theme originated in the 1600s, when Britain, France and Holland all had their own East India Trading Companies. These were early forms of GSEs, and required Navies to keep the shipping lanes open (from each other and private pirates), and also a combination of government troops and company mercenaries (biz models for Blackwater) to "govern" colonial territories. Then later we had "Robber Barons" supported by government "Pinkertons", and also worldwide oil exploration with governments contesting drilling rights, ranging from WW2 in the Pacific thru making business contracts with non-democratic governments and the USG being the peacekeeper in the region.
Fortunately, civilization has moved forward over this period, but there still are problems.
Saw Barney Frank on CNBC yesterday trying to "clarify" what the situation is with F&F. To paraphrase, he seemed to be saying that the the "implicit guarantee" of F%F debt idea was a rumor that somehow got started and he doesn't know who started it. It wasn't the USG.
He stated "his" position (I still don't know if that is the official USG position) is that once F&F got taken over in 2008, any new debt issued after that time has an "explicit" guarantee. But any debt issued prior to that time does not! (he should have told Ben, IMO, and I don't think the Chinese understand it that way.)
So here, native Americans have taken one small step towards understanding if they are backstopping $6 Trillion in GSE debt at face value, or if the figure is something smaller than that. But it seems like there is a ways to go yet. (The spread of pre 2008 MBS over Treasuries is very small at the moment, indicating investors are not yet aware of Barney's position on the matter)
Posted by: Cedric Regula at March 6, 2010 07:12 AM
So you are saying the Asian policy of building great reserves so that could tell Washington and the IMF to go to hell seems to have worked very well.
Posted by: spencer at March 6, 2010 10:01 AM
Just came across a piece to complement the Darrell Duffie paper posted by Brian.
This is another Tyler Durden post at Zero Hedge. He comments on work done by Yale and Wharton Professor Gary Gorton, who has held positions at the Bank Of England, the Federal Reserve and the FDIC.
Gary explains how the Shadow Banking run was a key enabler of the financial crisis/global recession. (In my opinion the long fuse was lite already, then the shadow banking system blew once the banks realized they are all a bunch of powder kegs)
Tyler begins to hyperventilate a bit (with good reason), and I hope he has his valium handy.
But mid article he posts an interesting chart by Gary which shows how the traditional and shadow banking systems relate, and even fills in dollar amounts and where the money comes from and goes.
At the bottom of the post a link is provided to Gary Gorton's discussion before the US Financial Crisis Inquiry Commission.
Posted by: Cedric Regula at March 6, 2010 07:35 PM