Global Financial Crisis, Financial Contagion, and Emerging Markets

F. Gulcin Ozkan, D. Filiz Unsal | IMF

The paper proposes a two-country Dynamic Stochastic General Equilibrium (DSGE) model to investigate the transmission of a global financial crisis that originates from financial frictions in the rest of the world in contrast to existing work on financial crisis in emerging market countries, however, which almost exclusively focused on the role of financial frictions in the domestic economy. The study finds that the scale of financial spillovers from the global to the domestic economy and trade openness are key determinants of the severity of the financial crisis for the domestic economy. Its results also suggest that the welfare ranking of alternative monetary policy regimes is determined by the degree of financial contagion, the degree of trade openness as well as the scale of foreign currency denominated debt in the domestic economy.

Financial Crisis
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