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The propagation of financial turbulence: interdependence, spillovers, and direct and indirect effects

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Jing, Z, Elhorst, JP, Jacobs, JPAM and de Haan, J 2017 , 'The propagation of financial turbulence: interdependence, spillovers, and direct and indirect effects' , Empirical Economics , pp. 1-24 , doi: 10.1007/s00181-017-1249-y.

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Abstract

We investigate the propagation of financial turbulence via trade, capital flows, and distance channels in the pre-crisis and Global Financial Crisis periods by modeling spillover and interdependence effects, using spatial econometric techniques. Financial turbulence is proxied by the ratio of nonperforming loans to total loans in a country. Spillover effects are defined as significant changes in the linkages between countries due to a shock, and interdependence effects as strong linkages among pairs of countries independent of shocks. Using annual data of 40 countries from 2003 to 2010, we find that interdependence and spillover effects should be jointly analyzed. Furthermore, our results suggest that the capital flows channel is more important than the other two channels in capturing propagation of financial turbulence. By deriving what is known in the spatial econometrics literature as direct and indirect effect estimates, we show that the marginal effects of macroeconomic variables (like GDP growth, inflation, and credit growth) on financial turbulence take different forms during a crisis than in tranquil periods.

Item Type: Article
Authors/Creators:Jing, Z and Elhorst, JP and Jacobs, JPAM and de Haan, J
Keywords: financial turbulence, interdependence, spillover effects, spatial panel econometrics
Journal or Publication Title: Empirical Economics
Publisher: Springer
ISSN: 0377-7332
DOI / ID Number: 10.1007/s00181-017-1249-y
Copyright Information:

Copyright 2017 the Authors. Licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) https://creativecommons.org/licenses/by/4.0/

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