The Initial Impact of the Crisis on Emerging Market Countries

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 advanced economies to emerging market countries. We first develop a simple open economy model, which allows for imperfect capital mobility and potentially contractionary effects of exchange rate depreciation due to foreign debt exposure. We then look at the cross-country evidence. The data suggest a strong role of both trade and financial shocks. Perhaps surprisingly, they 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