Journal of Asian Economics 21 (2010) 239–241

Contents lists available at ScienceDirect

Journal of Asian Economics

Guest editors’ introduction

The financial crisis of 2008–2009: Origins, issues, and prospects§

Stijn Claessens a, M. Ayhan Kose b,*
a
International Monetary Fund, University of Amsterdam, and CEPR, USA
b
International Monetary Fund, Research Department, 700 19th Street, N.W., Washington, DC 20431, USA

A R T I C L E I N F O

Article history:
Received 12 February 2010
Accepted 16 February 2010

The recent financial crisis has resulted in the most severe global recession in the postwar period. It also caused the most
synchronized global recession episode of the past seventy years as virtually all of the advanced economies went into a
recession and many emerging and developing economies followed suit. After two years of enormous stress in international
financial markets and large declines in real activity around the world, the global economy has started showing early signs of
growth. However, the recovery still appears to be fragile and the global economy is likely to feel the adverse effects of the
crisis for a long time period.
The global recession has raised a number of new and complex policy questions about the conduct of monetary, fiscal and
financial sector policies. Importantly, the crisis has led to an intense discussion about the nature of macroeconomic research
within the economics profession. It has also reminded us how little we know about the implications of financial market
developments for the real economy. In addition, it has shown that our knowledge is quite limited about the effects of
advances in financial markets on the real sector, including through securitization and international financial integration.
This special issue puts together seven papers analyzing various aspects of the crisis. Some of the papers examine the global
challenges associated with the crisis, while some others focus on issues mainly related to the Asian economies. Together, there
are three major topics the papers in this special issue address. The first topic examines a variety of policy challenges associated
with the crisis. Importantly, the crisis has shown that the conduct of monetary policy becomes extremely challenging during
periods of elevated financial stress especially when they coincide with outright financial crisis (Mishkin).
The second major topic the special issue focuses on is the nature and cost of the recent crisis. The papers under this topic
review the evidence of differences and similarities between the latest episode and previous crises (Claessens, Kose, and
Terrones). Papers also show how the macroeconomic implications of this crisis compare with earlier ones, focusing on the
real costs associated with recessions overlapping with periods of financial turmoil in Asia (Hong, Lee, and Tang). Moreover,
they present a dynamic general equilibrium perspective to assess the short- and long-run effects of the crisis for Asia (Han,
Zhang, and Zhang).
The third topic of the special issue is the spread of the crisis from advanced economies to the Asian emerging markets. One
of the most surprising dimensions of the crisis has been its rapid transmission from the U.S. mortgage markets to global

§
We would like to thank the editor, Michael Plummer, for inviting us to edit this special issue and the authors for their invaluable contributions. We also
thank David Fritz and Ezgi Ozturk for providing outstanding research assistance. The views expressed in this paper are those of the author(s) and do not
necessarily represent those of the IMF or IMF policy.
* Corresponding author.
E-mail addresses: sclaessens@imf.org (S. Claessens), akose@imf.org (M.A. Kose).

1049-0078/$ – see front matter ß 2010 Elsevier Inc. All rights reserved.
doi:10.1016/j.asieco.2010.02.003
240 S. Claessens, M.A. Kose / Journal of Asian Economics 21 (2010) 239–241

financial markets along with the unprecedented collapse in international trade flows around the world. The papers collected
on this topic study the transmission of the crisis through trade flows (Fidrmuc and Korhonen), through equity market
linkages (Yilmaz), and through linkages of credit markets (Kim, Loretan, and Remolona).
In the first paper of the special issue, Mishkin provides an assessment of intricacies of monetary policy formulation during
financial crises. In particular, he emphasizes the importance of flexibility in the conduct of monetary policy during periods of
financial disruptions. He argues that these financial disruption episodes are accompanied with two distinct types of risk. The
first type is valuation risk due to the extent that market participants become more uncertain about the returns on a specific
asset. The second type is macroeconomic risk because of the implications of uncertainty about asset prices for the real
economy. He argues that monetary policy during such periods needs to be quite different than in times of normal market
functioning, because financial disruptions produce large deviations from the linear-quadratic framework often employed in
normal times. The implication of this is that the risks associated with financial disruptions result in a highly nonlinear
optimal monetary policy function. Mishkin concludes that monetary policy needs to be especially timely, decisive and
flexible during such periods.1
The paper by Claessens, Kose, and Terrones provides an assessment of various aspects of the causes and consequences of
the crisis and thereby sets the stage for the other papers. In particular, they analyze three intensely debated questions about
the global financial crisis. The first two questions they examine are the similarities and the differences between the latest
crisis and the previous ones. They argue that the latest crisis featured some close similarities to the earlier ones, but it also
exhibited some significant differences, including the explosion of opaque and complex financial instruments in highly
integrated global financial markets. The third question they study is the depth of recessions associated with this global
financial crisis. Although the latest episode took a very heavy toll on the real economy, they claim that this was not a
surprising outcome. They report that recessions associated with periods of deep financial disruptions typically result in
much larger declines in economic activity than other recessions do. It also suggests that for many countries the global
financial crisis will scar growth dynamics for the foreseeable future.
The next two papers study the implications of the crisis for Asia. The first one provides empirical evidence regarding the
cost of recessions and various types of financial stress episodes, and the second one employs a dynamic general equilibrium
model to assess the adverse effects of the crisis in the region. Specifically, Hong, Lee, and Tang examine the implications of
the global financial crisis for Asia in light of the past crises episodes the region experienced. They employ a large panel data of
21 developing Asian economies over the period of 1961–2007. They find that recessions and financial disruptions in Asia take
place more often, lead to deeper slumps in activity, and last longer than they do in advanced countries. In addition, recessions
associated with credit crunches and equity market crushes result in deeper recessions in Asia.
The next paper by Han, Zhang, and Zhang employs a multi-country version of a dynamic stochastic general equilibrium
model to analyze the macroeconomic implications of the crisis for the Asia-Pacific economies. They conclude that, in the
short run, in addition to the traditional trade channel, the U.S. financial crisis affects the region through financial channels
which are especially evident in banking sector contagion, flight to quality across borders, and equity market contagion. They
show that the relative importance of these financial channels differs across countries in the region. In the medium-term,
higher savings rate in the United States can help correct the global imbalances. Although increasing public debt in the United
States may not have a substantial effect on global imbalances, it can negatively affect the regional growth prospects because
of its potential impact on global interest rates.
The following three papers analyze the spread of the crisis in the Asia-Pacific region using various approaches. The
‘‘contagion’’ is an important topic, since the sophisticated networks of cross-border financial linkages and trade flows have
been instrumental in the rapid spread of the crisis from advanced countries to emerging and developing ones. The first paper
by Yilmaz considers the differences in the dynamics of return and volatility spillovers over time in the 10 East Asian equity
markets from 1992:1 to 2009:4. Using a recently developed methodology, he reports that volatility and return spillovers
tend to behave differently over time and across countries. His findings also indicate that the burst in volatility spillover index
takes place during major crises. The behavior of return spillover index suggests that the East Asian equity markets have
become increasingly more integrated over time. Yilmaz also shows that the global financial crisis coincided with peaks in
both return and volatility spillover indices reflecting the depth and scope of the latest episode.
The second paper by Fidrmuc and Korhonen analyzes the transmission of the global financial crisis to India and China
using dynamic correlations, focusing on the trade channel. Their results suggest that the extent of business cycle
comovement between the two major emerging Asian economies and the advanced countries has been low. However, the
cyclical correlations between these two countries and the advanced countries rose during the financial crisis possibly
because of the major common shock stemming from the crisis. Advanced countries with stronger trade linkages with China
and India tend to have higher cyclical correlations. They conclude that although trade linkages between advanced countries
and the two Asian giants are strong, their business cycles are not as closely aligned, as one would expect.

1
In a recent paper, Blundell-Wignall and Atkinson (2009) presents an agenda of policy reform in light of the causes of the global financial crisis. They
argue that there are four policy related dimensions of the crisis. First, capital rules and tax wedges set up clear arbitrage opportunities for financial firms
over an extended period. Second, regularity changes permitted leverage to accelerate since 2004 up until the crisis. Third, systemically important firms were
permitted to emerge and barriers to contagion risk within them were explicitly broken down as a new business model in banking with an equity culture
emerged. Fourth, cumbersome regulatory structures with poor allocation of responsibilities to oversee new activities in the financial sector were in place.
They provide a detailed list of policy measures to cope with the challenges of the crisis.
 S. Claessens, M.A. Kose / Journal of Asian Economics 21 (2010) 239–241 241

The third paper by Kim, Loretan, and Remolona focuses on how valuation losses were a major channel of contagion of the
crisis into the Asian credit markets. In order to examine valuation losses, they analyze fluctuations in credit default swaps
(CDSs) and to capture the effects of default risk, they study expected default frequencies (EDFs) for major Asian borrowers
using monthly data for the time period 2005:1 to 2009:1. They also account for global and regional risk aversion using
principal components from the movements of various country/region specific CDS indices. Their findings indicate that while
EDFs have significant but economically weak effects on changes in CDS spreads, principle components on spreads have
significant and strong effects on valuations. They conclude that shifts in risk aversion, rather than reassessments of risk, are
the main drivers of valuations of credit instruments.
Collectively, the papers in this special issue show that understanding various aspects of the latest crisis promises to be an
exciting avenue for future research. The task ahead is a very challenging one, requiring a rigorous synthesis of theoretical and
empirical studies. However, the value added of this research program is enormous. Armed with solid research, well-designed
macroeconomic and financial policies can go a long way to prevent future crises. Given the unavoidable nature of crises, if (or
when) crises happen, such research can also help design policies that can mitigate their disastrous consequences for the real
sector. Undoubtedly, this agenda will keep researchers busy for a number of years.

Reference

Blundell-Wignall, A., & Atkinson, P. (2009). Origins of the financial crisis and requirements for reform. Journal of Asian Economics, 20(5), 536–548.