GFC

2008-2009, looking at the transmission of international shocks to emerging market economies

Variation of MF

- small open economy
- static model
- fixed pice
- imperfect capial mobility
- potentially contractionary effects of currency depreciation due to foreign debt exposure ie ML condition does not necessarily hold

Output and ER in equilibrium

balance sheet effect is stronger as D is larger
- Larger foreign debt is likely to amplify the effects so shift in Y is larger than in e

- Empirical analysis to shed light on heterogeneity in country outcomes
- Based on 29 emerging market countries (from Central and Eastern Europe, Asia, Latin America, and Africa)
- Highlight unexpected growth - All 29 EMCs in the sample had negative unexpected growth over 2008Q4 and 2009Q1, but with substantial variations across them

- Financial shocks: foreign debt to GDP ratio and current acount
- Trade shocks: export share of GDP (more open = larger shock) and unexpected partner growth (more negative if growth is slower)

- Heterogeneity in the output impact: Lithuania (almost 30% negative growth over the 2 quarters) and China (less than 5%) depends on the compostion of GDP growth

- constrained by data availability on quarterly GDP data and quarterly IMF forecast of GDP

- Use forecasting errors to measure the impact of the crisis
- Forecasts prior to Lehman collapse from Consensus Forecast and WEO Forecast

- Trade linkages: sharp fall in advanced economy demand, spillover effects greater for those wth strong trade links with them
- Financial linkages: global crisis originated in the financial sector in advanced economies, countries with close financial ties with advanced economies are expected to have been affected severely
- Underlying vulnerabilities and financial structure: if prior to the crisis there was rapid credit growth in emerging countries based on foreign borrowing, the reversal of capital flows during the crisis can cause severe balance sheet problems
- Overall policy and institutional framework: whether there is room for countercyclical fiscal policies, countries with more flexible exchange
rates may manage external shocks more easily