External finance, sudden stops and financial crisis: what is different this time?

Gulcin Ozkan and Filiz Unsal

Discussion Papers from Department of Economics, University of York

Abstract: This paper develops a two-country dynamic, stochastic general equilibrium(DSGE) model to investigate the transmission of a global financial crisis to a small open economy. Central to our framework are financial frictions that play a major role in the macroeconomic adjustment to global credit tightening. We find that small open economies hit by a sudden stop arising from financial distress in the global economy are likely to face a more prolonged crisis than when they experience a financial shock of domestic origin. This is because an important source of difficulty in responding to a global financial crisis is the inability of countries to export their way out of crisis due to the slump in world consumer demand initiated by the global financial distress -as is painfully experienced by many countries in contemporary times. Moreover, we show that the greater a country's trade integration with the rest of the world, the greater the fluctuation of its macroeconomic aggregates in response to a global financial crisis.

Keywords: sudden stops; financial crises; emerging markets. (search for similar items in EconPapers)
JEL-codes: E5 F3 F4 (search for similar items in EconPapers)
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Citations: View citations in EconPapers (4)

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Working Paper: External Finance, Sudden Stops, and Financial Crisis: What is Different This Time? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:09/22

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