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

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.
ERC Working Papers


Can Developing Countries Maintain Financial Stability after the Global Crisis? The Role of External Financial Shocks
Cömert, Hasan (2018-01-01)
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 ...
The Macroprudential supervision in the aftermath of the 2008 global financial crisis: the US example /
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The Possibility of financial crisis in Developing Countries under flexible exchange rate regimes : a multidimensional approach
Çolak, Mehmet Selman; Cömert, Hasan; Department of Economics (2012)
Many economists and politicians have blamed fixed exchange rate regimes for several crises taking place in developing countries after the 1980s. According to them, since the beginning of the 2000s, widespread implementation of flexible exchange rate regimes and high international reserves have prevented developing countries from experiencing similar catastrophic experiences. This interpretation seems to be misleading. We believe that even flexible exchange rate regimes with high international reserves do no...
Citation Formats
H. Cömert, “Can Financial Stability be Maintained in Developing Countries after the Global Crisis The Role of External Financial Shocks,” ERC Working Papers, pp. 201–226, 2014, Accessed: 00, 2021. [Online]. Available: