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Leaning against the global financial cycle

Andrea Ferrero, Maurizio Michael Habib, Livio Stracca and Fabrizio Venditti

No 2763, Working Paper Series from European Central Bank

Abstract: We study the role and the interaction of the quality of institutions and of counter-cyclical policies in leaning against the Global Financial Cycle (GFC) in Emerging Economies (EMEs). We show that heteroegeneity in institutional strength is a key determinant of the different effects of the GFC on EME domestic financial conditions. Institutional strength also shapes the response in terms of counter-cyclical policies to sudden changes in global financial conditions as well as the effectiveness of such policies. We illustrate in a simple stylised model that countries may in fact decide to undertake ex ante costly structural reforms that reduce their vulnerability to the GFC or react ex post to the financial s hock. However, we also find that the Covid-19 episode seems to deviate somewhat from the general pattern of EME reaction to shifts in the GFC. JEL Classification: F32, F38, E52, G28

Keywords: capital controls; emerging markets; foreign-exchange intervention; Global Financial Cycle; institutions.; macro-prudential policies; monetary policy (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mon and nep-opm
Note: 334027
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222763

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