Financial Stress, Downturns, and Recoveries

Selim Elekdag, Roberto Cardarelli and Subir Lall ()

No 09/100, IMF Working Papers from International Monetary Fund

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 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-opm
Date: Written
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