BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 26/2012:
The Determinants of Vulnerability to the Global Financial Crisis 2008 to 2009: Credit Growth and Other Sources of Risk
Martin Feldkircher ()
Abstract: In this paper, we identify initial macroeconomic and
financial market conditions that help explain the distinct response of the
real economy of a particular country to the recent global financial crisis.
Using four measures of crisis severity, we examine a data set with over 90
potential explanatory factors employing techniques that are robust to model
uncertainty. Four findings are of particular note. First, we find empirical
evidence for the pivotal role of pre-crisis credit growth in shaping the
real economy's response to the crisis. Specifically, a 1% increase in
pre-crisis lending translates into a 0.2% increase in the cumulative loss
in real output. Moreover, the combination of pronounced growth in lending
ahead of the crisis and the country's exposure to external funding from
advanced economies is shown to intensify the real downturn. Economies with
booming real activity before the crisis are found to be less resilient to
the global shock. Buoyant growth in real GDP in parallel with strong growth
of credit particularly exacerbated the effects of the recent crisis on the
real economy. Finally, we provide empirical evidence on the importance of
holding international reserves in explaining the response of the real
economy to the crisis. The effect of international reserves accumulation as
a shelter to the global shock rises in credit provided by the domestic
banking sector. The results are shown to be robust to several estimation
techniques, including those allowing for cross-country spillovers.
Keywords: financial crisis; credit boom; international shock transmission; Bayesian model averaging; cross-country analysis; non-linear effects; (follow links to similar papers)
JEL-Codes: C11; C15; E01; O47; (follow links to similar papers)
38 pages, October 31, 2012
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