Can developing countries maintain financial stability after the global crisis? The role of external financial shocks

• Published in: Panoeconomicus Vol. 65; no. 2; pp. 201 - 226
• Main Authors: Cömert, Hasan, Çolak, Mehmet
• Format: Journal Article
• Language: English
• Published: Novi Sad The Associations of Economists of Vojvodina 2018; Economists' Association of Vojvodina
• Subjects: Autonomy; Comparative studies; Crises; Currency; Developing countries; Economic crisis; Economic development; Economic models; Economic policy; Emerging markets; Financial analysis; financial flows; financial stability; Financial systems; Foreign exchange rates; global crisis; Industrialized nations; International cooperation; International finance; LDCs; Legitimacy; Macroeconomics; Monetary policy; Recessions; Reserve assets; Roles; safe haven; Securities markets; sudden stop; United States > US
• ISSN: 1452-595X; 2217-2386
• DOI: 10.2298/PAN150905028C

The recent global turmoil severely affected some developing economies. However, in general, these nations survived the crisis with less damage compared with advanced countries. The majority of developing countries did not experience a financial system collapse. What were the main factors behind their relatively better performance? We argue that the main reason was the relatively moderate financial account shocks, in terms of both magnitude and duration, experienced by developing economies during the global crisis. This was due to the fact that advanced countries could not fully serve their roles as safe havens during the recent global turmoil. Furthermore, developing countries enjoyed greater autonomy and legitimacy in implementing expansionary monetary and fiscal policies in an environment in which international cooperation partially met the need for an international lender of last resort. If the returns in advanced countries become more attractive, developing countries may face larger external financial shocks in future crises. nema