The Impact of the Global Financial Crisis on Business Cycles in Asian Emerging Economies

We analyze the transmission of global financial crisis to business cycles in China and India. The pattern of business cycles in emerging Asian economies generally displays a low degree of synchronization with the OECD countries, which is consistent with the decoupling hypothesis. By contrast, however, the current financial crisis has had a significant effect on economic developments in emerging Asian economies. Applying dynamic correlations, we find wide differences for different frequencies of cyclical development. More specifically, at business cycle frequencies, dynamic correlations are typically low or negative, but they are also influenced most by the global financial crisis. Finally, we find a significant link between trade ties and dynamic correlations of GDP growth rates in emerging Asian countries and OECD countries.financial crisis, business cycles, decoupling, trade, dynamic correlation

The impact of the global financial crisis on business cycles in Asian emerging economies

We analyze the transmission of global financial crisis to business cycles in China and India. The pattern of business cycles in emerging Asian economies generally displays a low degree of synchronization with the OECD countries, which is consistent with the decoupling hypothesis. By contrast, however, the current financial crisis has had a significant effect on economic developments in emerging Asian economies. Applying dynamic correlations, we find wide differences for different frequencies of cyclical development. More specifically, at business cycle frequencies, dynamic correlations are typically low or negative, but they are also influenced most by the global financial crisis. Finally, we find a significant link between trade ties and dynamic correlations of GDP growth rates in emerging Asian countries and OECD countries.financial crisis; business cycles; decoupling; trade; dynamic correlation

The Effects of Financial Crises on Developing Countries

In ten years, emerging countries have moved from net borrowers to net lenders. At the root of the 1997-98 financial crisis, they became collateral victims of the 2007-08 crisis that erupted in the United States and Europe, after having withstood relatively well at first. This article proposes an analysis of the repositioning of emerging countries in the global financial sphere on two levels. This concerns, on the one hand, institutional representativeness vis-à-vis the industrialized countries, the IMF and, on the other hand, the role of emerging countries in the context of a contagious financial crisis. In this sense, the article raises the question of the coupling or the decoupling of the economic cycles of the emerging countries with those of the industrialized countries, in an environment of financial interconnection. Indeed, this 2008 crisis will appear as a shock common to emerging countries from a financial point of view, while the Asian crises of 1997-98 were not triggered by common shocks. But the economic decoupling hypothesis has yet to be verified: everything will depend on the depth of the US recession and the continued strength of domestic demand in emerging economies

East Asia and the global/transatlantic/Western crisis

This paper introduces the special collection on East Asia and the Global Crisis. After justifying why a focus on East Asia is appropriate, it draws out the main themes that run through the individual contributions. These are the extent to which the region is decoupling from the global economy (or the West), the increasing legitimacy of statist alternatives to neoliberal development strategies, and the impact of crises on the definition of ―region‖ and the functioning of regional institutions and governance mechanisms

Integration, decoupling and the global financial crisis: A global perspective

The recent global recession requires policy makers to identify the relative importance of shock transmission mechanisms in each region and devise counter policy measures against future idiosyncratic shocks. In the last decade, world dynamics have changed considerably due to increased openness and integration requiring considering business cycles at regional levels. This paper analyzes the business cycle movements of the EU, ASEAN+3, NAFTA, MERCOSUR and SAARC regions to investigate why the subprime mortgage crisis of 2007 did not spread globally compared to the crisis that began with the fall of Lehman Brothers in September 2008. Employing a Panel Vector Autoregressive framework (PVEC), this study finds that the subprime mortgage crisis shock originated in the real sector (falling US housing prices) and was transmitted through trade variables. Due to absence of short term trade variables transmission mechanism in all regions except the MERCOSUR and SAARC, the shock did not spread widely to other regions. Even in the MERCOSUR and SAARC, due to limited goods exports exposure to the US, the shock was not significant. Resultantly, these regions exhibited a decoupling phenomenon during the subprime mortgage crisis. In contrast, the second shock originated with the fall of Lehman Brothers in 2008 and was transmitted through financial variables. Due to the presence of the short term causal relationship of the financial variable with GDP in all regions except SAARC, the slowdown contagion spread to most regions. As a result, the slowdown triggered the trade variables shock transmission mechanism and the SAARC region was also affected. Consequently, a business cycle convergence phenomenon was observed in the regions. Therefore, business cycles decoupling and convergence phenomena in the regions depend not only on the origin of the shock but also on the relative importance of the transmission mechanisms in each region.Integration, Decoupling, Financial crisis, EU, NAFTA, ASEAN, MERCOSUR, SAARC, Business cycle, FDI, Exports, Intra industry Trade, Sub prime mortgage crisis, Lehman Brothers, Short term capital flows, Panel Cointegration, Panel stationarity, Panel Vector Error Correction (PVEC)

"Global Imbalances, the U.S. Dollar, and How the Crisis at the Core of Global Finance Spread to "Self-insuring" Emerging Market Economies"

This paper investigates the spread of what started as a crisis at the core of the global financial system to emerging economies. While emerging economies had exhibited some resilience through the early stages of the financial turmoil that began in the summer of 2007, they have been hit hard since mid-2008. Their deteriorating fortunes are only partly attributable to the collapse in world trade and sharp drop in commodity prices. Things were made worse by emerging markets' exposure to the turmoil in global finance itself. As "innocent bystanders," even countries that had taken out "self-insurance" proved vulnerable to the global "sudden stop" in capital flows. We critique loanable funds theoretical interpretations of global imbalances and offer an alternative explanation that emphasizes the special status of the U.S. dollar. Instead of taking out even more self-insurance, developing countries should pursue capital account management to enlarge their policy space and reduce external vulnerabilities.Financial Crisis; Capital Flows; Self-insurance; Capital Controls; Bretton Woods II Hypothesis; Global Saving Glut Hypothesis

"The International Monetary (Non-)Order and the 'Global Capital Flows Paradox'"

This paper sets out to investigate the forces behind the so-called "global capital flows paradox" and related "dollar glut" observed in the era of advancing financial globalization. The supposed paradox is that the developing world has increasingly come to pursue policies that resulted in current account surpluses and thus net capital exports—destined primarily for the capital-rich United States. The hypothesis put forward here is that systemic deficiencies in the international monetary and financial order have been the root cause behind today's situation. Furthermore, it is argued that the United States' position as issuer of the world's premiere reserve currency and supremacy in global finance explain the related conundrum of a positive investment income balance despite a negative international investment position. The assessment is carried out in light of John Maynard Keynes’s views on a sound international monetary and financial order.

Business cycles, international trade and capital flows: Evidence from Latin America

This paper adopts a flexible framework to assess both short- and long-run business cycle linkages between six Latin American (LA) countries and the four largest economies in the world (namely the US, the Euro area, Japan and China) over the period 1980:I-2011:IV. The result indicate that within the LA region there are considerable differences between countries, success stories coexisting with extremely vulnerable economies. They also show that the LA region as a whole is largely dependent on external developments, especially in the years after the great recession of 2008 and 2009. The trade channel appears to be the most important source of business cycle comovement, whilst capital flows are found to have a limited role, especially in the very short run

Emerging Asia: Decoupling or Recoupling

In this paper, we investigate the degree of real economic interdependence between emerging Asia and major industrial countries to shed light on the heated debate over the “decoupling” of emerging Asia. We first document the evolution of macroeconomic interdependence for emerging Asian economies through changing trade and financial linkages at both the regional and global levels. Then, by employing a panel vector autoregression (VAR) model, we estimate the degree of real economic interdependence before and after the 1997/98 Asian financial crisis. Empirical findings show that real economic interdependence increased significantly in the post-crisis period, suggesting “recoupling”, rather than decoupling, in recent years. Output shocks from major industrial countries have a significant positive effect on emerging Asian economies. More interestingly, the reverse is also true. Output shocks from emerging Asia (and the People’s Republic of China [PRC]) have a significant positive effect on output in major industrial countries. The result suggests that macroeconomic interdependence between emerging Asia and industrial countries has become “bi-directional,” defying the traditional notion of the “North–South relationship” as one of “uni-directional" dependence.Regional integration; decoupling; macroeconomic interdependence; trade and financial market linkages; VAR

The new resilience of emerging and developing countries: systemic interlocking, currency swaps and geoeconomics

The vulnerability/resilience nexus that defined the interaction between advanced and developing economies in the post-WWII era is undergoing a fundamental transformation. Yet, most of the debate in the current literature is focusing on the structural constraints faced by the Emerging and Developing Countries (EDCs) and the lack of changes in the formal structures of global economic governance. This paper challenges this literature and its conclusions by focusing on the new conditions of systemic interlocking between advanced and emerging economies, and by analysing how large EDCs have built and are strengthening their economic resilience. We find that a significant redistribution of ‘policy space’ between advanced and emerging economies have taken place in the global economy. We also find that a number of seemingly technical currency swap agreements among EDCs have set in motion changes in the very structure of global trade and finance. These developments do not signify the end of EDCs’ vulnerability towards advanced economies. They signify however that the economic and geoeconomic implications of this vulnerability have changed in ways that constrain the options available to advanced economies and pose new challenges for the post-WWII economic order