Impacts, Transmission and Recovery
Edited by Maurice Obstfeld, Dongchul Cho and Andrew Mason
Chapter 4: International Financial Markets and Transmission of the Crisis: Determinants of Exchange Market Pressure and Absorption by International Reserves
Joshua Aizenman and Michael M. Hutchison INTRODUCTION This chapter evaluates how the global financial crisis emanating from the United States was transmitted globally. Our focus is on the extent that the crisis caused external pressures (exchange market pressure), measured by a combination of exchange rate depreciation and loss of international reserves, across different regions of the world and across countries with different income levels and differing levels of restrictions on international capital flows. International financial markets were at the heart of the worldwide financial crisis that emerged in late 2007 and reaching a climax between August 2008 and February 2009. Although the crisis started with the mortgagerelated (subprime) crisis in the United States, and was closely linked to banks in Western Europe holding mortgage-backed securities and derivative products, it quickly led to a global liquidity crisis that had a great and adverse affect on the rest of the world. We focus in this chapter on the extent to which the global financial shock adversely affected the external position of countries throughout the world, but especially in emerging market economies. We measure external position by looking at changes in exchange market pressure—a combination of exchange market depreciation and loss of international reserves— as well as considering these two components separately. We are interested in two basic questions. First, how has the transmission of the global shock been affected by the extent of international balance sheet exposure, financial development and financial openness?1 Second, given the degree of exchange market pressure,...
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