Abstract
The global financial crisis of 2007–09 has promoted a renewed interest in cross-border spillovers of financial stress shocks. Financial stress is a serious disruption to the proper functioning of financial markets that has adverse effects on real economic activity. The US subprime mortgage crisis developed into a full-blown financial crisis, spreading the financial stress quickly to the rest of the world. The underlying cause of the crisis was the combination of excessive risk taking by private sectors and the failure of public sectors to address systemic risks arising from market failures. In response to the crisis, internationally coordinated efforts have been made to increase the resilience of global financial systems by promoting a range of regulatory reforms. However, the question remains as to whether the global financial systems will become much more resilient by the ongoing reforms.
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- 1.
In the originate-to-distribute model, the mortgage is originated by a mortgage broker and the mortgage-backed security is distributed to various investors. Asymmetric information problems arise between the mortgage originator and the investors.
- 2.
Gorton (2009) discusses the banking panic nature of the US financial crisis evolved around the shadow banking system. Mishkin (2010) provides a brief explanation on why the subprime mortgage crisis developed into a full-blown financial crisis and how the US financial crisis spread to the rest of the world.
- 3.
The KCFSI can be downloaded at http://www.kc.frb.org/research/indicatorsdata/kcfsi/.
- 4.
Forbes (2012) provides an excellent survey of literature on cross-border spillovers of economic shocks, which is often referred to as contagion.
- 5.
The economic indicators are derived from four broad categories: (1) production and income; (2) employment, unemployment, and hours; (3) personal consumption and housing; (4) sales, orders, and inventories. Further details of the index and the data can be obtained at http://www.chicagofed.org/webpages/publications/cfnai/.
- 6.
The first difference of FF rate is used because the level of the variable is nonstationary according to the augmented Dickey-Fuller test. All of the transformed variables are stationary at the 5 % significance level.
- 7.
All of the data for IIP are seasonally adjusted. STP is converted to the real value by deflating using CPI. The data source is the IMF’s International Financial Statistics.
- 8.
The start date of 1991 reflects the need to accommodate lags in the VAR.
- 9.
See MacKinnon (2006) for a survey of bootstrapping methods.
- 10.
An exception is Malaysia, where a positive monetary positive shock causes a statistically significant increase in IIP and a decline in STP after 2 months.
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Acknowledgments
We are very grateful to Pierre Jacquet and Kashyap Arora for their insightful and useful comments on the earlier version of the paper. We retain responsibility for any remaining errors.
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Chen, W., Kinkyo, T. (2016). Cross-Border Spillovers of Financial Stress Shocks: Evidence and Policy Implications. In: Kathuria, R., Nagpal, N. (eds) Global Economic Cooperation. Springer, New Delhi. https://doi.org/10.1007/978-81-322-2698-7_11
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