The widespread impact of the global financial crisis of 2008–09 has spurred researchers to examine how the associated recession was transmitted from advanced to emerging economies. Recent IMF studies have found that pre-crisis vulnerabilities such as large current account deficits, rapid credit growth, and high levels of short-term debt were strongly associated with the magnitude of spillovers. Trade, bank lending, and financial markets served as key transmission channels.

The global financial crisis of 2008–09 set off a great recession that hit both advanced and emerging economies. Many emerging markets without direct exposure to the toxic assets at the root of the financial crisis in advanced economies experienced sharp output declines nonetheless. Predictions of a decoupling among emerging markets did not materialize, as economic activity in both advanced and emerging countries declined by over 4 percent in 2009 relative to April 2008 forecasts. Of the 33 emerging markets for which seasonally-adjusted quarterly real GDP data are available, 29 experienced downturns over the most intense part of the recession, the last quarter of 2008 and first quarter of 2009. Real exports fell in all these countries by an average of nearly 15 percent.

Attempts to identify ex ante determinants of the impact on emerging markets and its variation across countries have drawn from the previous literature on crisis determinants (see, for example, Kaminsky and Reinhart, 1999). Three cross-sectional studies find that financial vulnerabilities are strongly associated with the impact of the crisis. In Blanchard, Das, and Faruqee (forthcoming) the pre-crisis ratio of short-term external debt to GDP and GDP growth among trading partners are significant determinants of the magnitude of the downturn during the crisis for a sample of 29 major emerging markets. In Lane and Milesi-Ferretti (forthcoming) high pre-crisis current account deficits and rapid pre-crisis credit growth, in addition to economic activity among trading partners, explain the growth of economic activity in 2009 across advanced and emerging economies. In Berkmen and others (2009) pre-crisis loan-to-deposit ratios and credit growth are negatively associated with output revisions in emerging markets. These studies found no effects on growth outcomes from the level of international reserves or openness variables such as ratios of trade or financial assets to GDP.

Most studies of the transmission channels through which the crisis affected emerging economies rely to some extent on pre-crisis data, but illustrate the potential variety and magnitude of transmission mechanisms. This review focuses on trade, bank lending, and financial markets.

The sharp observed drop in global trade and the importance of partner-country growth in the above studies underline the importance of trade channels in transmitting the impact of the crisis. Bems, Johnson, and Yi (2010) construct a global input-output model for 55 countries covering a sizable majority of global output. They find that Canada, Mexico, and emerging Europe were hit particularly hard by their ties to the United States and the EU-15, respectively, with comparable effects on Japan and emerging Asia through links to both regions. Di Giovanni and Levchenko (2010) provide micro evidence on these linkages via a cross-country, industry-level panel dataset, showing that sector pairs that trade more exhibit stronger bilateral comovement.

Two studies have explored the role of distress in advanced-country banks in propagating the crisis domestically. Barajas and others (2010) examine a panel of large U.S. banks and find that lending fell by more at banks with lower capital ratios entering the crisis, as well as at those whose capital declined by more during the crisis. ihăk and Koeva Brooks (2009) employ a distance-to-default measure based on equity values and balance sheet variables. They trace out the links between euro area banks’ increased financial stress, cutbacks in loan supply, and declines in aggregate economic activity.

Several studies, in turn, examine the links between advanced-country banks’ distress and their operations in emerging markets. For example, Bakker and Gulde (2010) outline the links between the retrenchment in Western European banks’ flows to emerging European economies and the sharp declines in domestic demand experienced in the region. In line with the overview studies mentioned above, the intensity of the downturn was strongly associated with the pre-crisis rate of private sector credit growth and current account deficit. Using Bank for International Settlements data, Maechler and Ong (2009) and Àrvai, Driessen, and Ötker-Robe (2009) calculate that for some emerging European economies, cross-border banking exposures had grown quite large relative to GDP, facilitating the rapid rise in private sector credit. Kamil and Rai (2010) ascribe some of Latin America’s relatively better performance during the crisis to the greater reliance of the region’s banking system on domestic sources of funding. Tong and Wei (2009) perform empirical tests that shed light on how the reduced supply of bank lending affected the corporate sector and report that firms more intrinsically dependent on external finance, especially for working capital, experienced larger declines in stock prices. These effects were mitigated in countries that relied on foreign direct investment for a large proportion of their pre-crisis financing, while countries that depended on portfolio and bank flows were hit harder.

The first tremors of the crisis in advanced economies were felt in financial markets, and these also served as a potent channel of transmission to emerging economies. Balakrish-nan and others (2009) construct financial stress indices for 18 emerging markets, following the methodology of Card-arelli, Elekdag, and Lall (2009) on advanced economies. These indices cover sovereign and bank risk, stock market returns and volatility, and exchange rate pressure. They find that advanced economy financial stress can explain about 70 percent of emerging-market financial stress, on average. Chen and others (2010) examine the transmission of distress from advanced to emerging economies using distance-to-default measures for both banks and nonfinancial corporations, within a global vector autoregression (GVAR) model. Bank or corporate distress in advanced economies spurs similar distress in both advanced and emerging economies, bringing about a sharp drop in equity prices and declines in industrial production. Galesi and Sgherri (2009) also employ a GVAR and find that negative shocks to U.S. equity markets lead to lower equity prices, private sector credit, and economic activity among several advanced and emerging European countries.

Some studies have attempted to quantify within a single framework the contributions of multiple transmission channels. Swiston (2010) enters trade and financial variables as exogenous regressors in vector autoregressions for several Central American countries, and finds that even for a region with relatively low international financial integration, financial channels transmit over half of U.S. growth spillovers on average, while trade channels contribute a third. The study finds that both trade and financial spillovers were stronger during the crisis period than pre-crisis. Moriyama (2010) estimates a panel generalized method of moments for emerging markets in the Middle East and North Africa and finds that slightly more than a third of the slowdown in real GDP growth in these countries during the crisis was due to financial stress, while slightly less than a third was due to external demand.

The simultaneous downturn in global trade, capital flows, and financial markets in 2008-09 strongly affected emerging economies. The impact of the crisis was less a function of the degree of international integration than of specific vulnerabilities—including pre-crisis credit booms, high short-term debt levels, and large current account deficits. Those countries that exercised strong financial supervision so as to avoid the emergence of asset bubbles or unsustainable borrowing, as well as those that maintained space for countercyclical policy, found themselves better placed to weather the storm, and the implementation of these policies on a more widespread basis would help to prepare for the next one.