Cross-Country Causes and Consequences of the (note)2008 Crisis: International Linkages and American Exposure
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Andrew K. Rose (University of California at Berkeley) and Mark M. Spiegel (Federal Reserve Bank of San Francisco)
National Bureau of Economic Research, Working Paper No. 15358
As the financial crisis of 2008 unfolded, the International Monetary Fund (IMF) and many other economic organizations called for the development of an early warning system to predict future downturns. But this paper casts serious doubt on the practicability of that idea. The authors find that the causes of the crisis differed too much across countries to create a common statistical model. They argue that a good predictive instrument must measure which countries will be most affected and when, and conclude that no available mechanism can accomplish this.
Examining a total of 85 countries, the authors focused both on those most severely hit by the crisis and on those relatively unaffected. The impact of the downturn was calculated through four factors: the change in the country’s 2008 GDP, the percentage shift in the national stock market during the year, the 2008 percentage change in the IMF currency exchange rate, and the country’s credit rating according to Institutional Investor. The authors also used economic performance data from 2006 and earlier to measure the impact of international financial conditions, domestic policies, and the real estate and equity markets.
The subprime credit collapse and housing bubble in the U.S. are generally blamed as the causes of the crash, but the authors analyzed six other hot spots, including the United Kingdom, Germany, and Japan. They found little evidence of the crisis spreading steadily, in the way a contagion such as a flu outbreak does. In fact, countries more exposed to the United States through heavy dependence on exports to the U.S. or a disproportionate share of U.S. assets, such as Canada, actually seem to have experienced smaller crises. And countries that did not see a significant U.S.-style decline in their housing market, such as Germany and Japan, still suffered heavily because of banking and trade issues. A country’s size had no significant impact on the intensity of the crisis there, but its income level had a significant negative impact — richer countries generally experienced a more intense crisis.
The authors found that preexisting economic conditions across nations had a minimal impact on the severity of their crisis, and that the causes of the 2008 downturn likewise couldn’t be tied to geography or proximity to rich countries. The researchers argue that it is impossible to predict the next crash because, even in hindsight, the recent crisis cannot be defined as either a sudden global shock or a slow, virus-like mutation that spread from the country of origin around the world. The causes of the crisis in individual countries seem too idiosyncratic, the paper concludes, for us to generalize about the past or to predict the future.
This paper finds no evidence that the causes of the financial crisis of 2008 could have been predicted, and raises doubts as to whether an early warning system can be developed to suggest where and when the next financial downturn will hit.