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BPEA Article

The Initial Impact of the Crisis on Emerging Market Countries

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To understand the diverse impact of the crisis across emerging
market countries, we explore the role of two shocks—the collapse in trade and
the sharp decline in financial flows—in the transmission of the crisis from the
advanced economies. We first develop a simple open economy model, which
allows for imperfect capital mobility and potentially contractionary effects of
currency depreciation due to foreign debt exposure. We then look at the crosscountry
evidence. The data suggest a strong role for both trade and financial
shocks. Perhaps surprisingly, the data give little econometric support for a central
role of either reserves or exchange rate regimes. We end by presenting case
studies for Latvia, Russia, and Chile.


Kristin J. Forbes

Jerome and Dorothy Lemelson Professor of Management, Professor of Global Economics and Management - MIT-Sloan School of Management

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