US financial meltdown may lead to deeper economic downturns
Sunday, 5 October 2008
FE Report
The current financial market meltdown being witnessed in the United States and other advanced economies will possibly lead to longer and deeper economic downturns in some of these countries, according to new IMF research.
"Economies like the United States, with more arms-length or market-based financial systems, seem to be particularly vulnerable to sharp contractions in activity in the face of financial stress," Charles Collyns, Deputy Director in the IMF's Research Department, said at a press briefing in Washington Thursday.
Citing the chapter, "Financial Stress and Economic Downturns," he added that "this is because leverage tends to be more procyclical in these economies, which means that when a shock hits the financial system, the process of deleveraging can be more severe, and the risks of a credit crunch are greater."
However, other factors also play a role in determining the impact of financial stress on the economy. In the case of the United States, the research notes, the health of the non-financial corporate sector and the timely and decisive reaction of the Federal Reserve in lowering interest rates have so far helped the country avoid slipping into a recession.
The current financial market meltdown being witnessed in the United States and other advanced economies will possibly lead to longer and deeper economic downturns in some of these countries, according to new IMF research.
"Economies like the United States, with more arms-length or market-based financial systems, seem to be particularly vulnerable to sharp contractions in activity in the face of financial stress," Charles Collyns, Deputy Director in the IMF's Research Department, said at a press briefing in Washington Thursday.
Citing the chapter, "Financial Stress and Economic Downturns," he added that "this is because leverage tends to be more procyclical in these economies, which means that when a shock hits the financial system, the process of deleveraging can be more severe, and the risks of a credit crunch are greater."
However, other factors also play a role in determining the impact of financial stress on the economy. In the case of the United States, the research notes, the health of the non-financial corporate sector and the timely and decisive reaction of the Federal Reserve in lowering interest rates have so far helped the country avoid slipping into a recession.