Can Financial Stability be Maintained in Developing Countries after the Global Crisis: The Role of External Financial Shocks?

Hasan Cömert and Mehmet Çolak ()

No 1411, ERC Working Papers from ERC - Economic Research Center, Middle East Technical University

Abstract: In the recent global turmoil, even though some developing economies were severely affected, in general, developing countries survived the crisis with less damage than advanced countries. The majority of developing countries did not experience a financial system collapse. What are the main factors behind the solid performance of many developing countries in the recent crisis? This paper argues that the main reason is the fact that developing countries did not face a strong financial account shock, especially in the form of capital reversals, during this period. In comparison to past developing country crises of the 80s and 90s, the financial account shocks in the global crisis were much more moderate. To a great extent, the fact that advanced countries could not fully serve their roles as safe havens in the global crisis explains why developing economies were not tested by destructive financial shocks in the recent crisis. Furthermore, developing countries enjoyed greater autonomy and legitimacy in implementing expansionary monetary and fiscal policies without much fear of the bigger financial shocks in an environment in which international cooperation partially meet the need for an international lender of last resort through swap operations and credit lines. If the developed countries, essentially European Union (EU) and the US, start serving fully their safe haven roles and the returns in the developed countries become much more attractive, developing countries may face larger external financial shocks. Even large reserves, flexible exchange rate regimes, healthy balance sheets on the papers and some so-called other strong fundamentals would not be enough to avoid financial collapses.

Keywords: Developing Countries; Recent Global Crisis; Financial Flows and Financial Markets. (search for similar items in EconPapers)
JEL-codes: E52 E58 F31 F32 G15 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2014-09, Revised 2015-01
New Economics Papers: this item is included in nep-acc, nep-mac, nep-mon and nep-opm
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http://erc.metu.edu.tr/en/system/files/menu/series14/1411.pdf First version, 2014 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:met:wpaper:1411

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