Financial Stress, Downturns, and Recoveries

60 Pages Posted: 19 May 2009

See all articles by Roberto Cardarelli

Roberto Cardarelli

International Monetary Fund (IMF)

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department

Subir Lall

International Monetary Fund (IMF)

Date Written: May 2009

Abstract

This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress - in particular banking distress - on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Economies with more arms-length financial systems appear to be particularly vulnerable to sharp contractions, due to the greater procyclicality of leverage in their banking systems.

Keywords: Financial crisis, Financial systems, Banking sector, Exchange markets, Securities markets, Banking crisis, Economic recession, Economic recovery, Business cycles, Cross country analysis

Suggested Citation

Cardarelli, Roberto and Elekdag, Selim Ali and Lall, Subir, Financial Stress, Downturns, and Recoveries (May 2009). IMF Working Paper No. 09/100, Available at SSRN: https://ssrn.com/abstract=1405586

Roberto Cardarelli

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Subir Lall

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202 623 6113 (Phone)

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