Financial Stress, Downturns, and Recoveries

Financial Stress, Downturns, and Recoveries

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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.In August, Mexico declared that it would no longer be able to service its debt. Subsequently, credit lines were cut and many ... Largest one-day decline in stock market values in the United States. On October 19, 1987, Dow Jones fell by 23anbsp;...

Title:Financial Stress, Downturns, and Recoveries
Author: Mr. Subir Lall, Mr. Roberto Cardarelli, Selim Elekdag
Publisher:International Monetary Fund - 2009-05-01

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