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

Author

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  • Zhongbo Jing

    (Central University of Finance & Economics)

  • J. Paul Elhorst

    (University of Groningen)

  • Jan P. A. M. Jacobs

    (University of Groningen
    University of Tasmania
    Australian National University
    CIRANO)

  • Jakob Haan

    (University of Groningen
    De Nederlandsche Bank
    CESifo)

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.

Suggested Citation

  • Zhongbo Jing & J. Paul Elhorst & Jan P. A. M. Jacobs & Jakob Haan, 2018. "The propagation of financial turbulence: interdependence, spillovers, and direct and indirect effects," Empirical Economics, Springer, vol. 55(1), pages 169-192, August.
    • Handle: RePEc:spr:empeco:v:55:y:2018:i:1:d:10.1007_s00181-017-1249-y
    DOI: 10.1007/s00181-017-1249-y
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    More about this item

    Keywords

    Financial turbulence; Interdependence; Spillover effects; Spatial panel econometrics;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F30 - International Economics - - International Finance - - - General

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