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Dampening the Impact of Global Financial Shocks (Sandri)

Dampening the Impact of Global Financial Shocks on Emerging Market Economies by Damiano Sandri published by IMFBlog (5/2020).

 

“The COVID-19 pandemic is impacting emerging markets through an unprecedented combination of domestic and external shocks. Among the latter, the pandemic has led to a sharp increase in global risk aversion and an abrupt retrenchment in foreign capital flows. Based on historical experience, these types of global financial shocks can significantly affect macroeconomic conditions in emerging markets, even if the exchange rate is flexible.

Our research in chapter 3 of the latest World Economic Outlook shows that emerging markets can enhance resilience to global financial shocks using macroprudential regulation.

Strengthening resilience with macroprudential regulation

Macroprudential regulation involves a broad range of measures aimed at buttressing financial stability. These may include capital requirements to strengthen bank balance sheets; limits on loan-to-value ratios to curb risk taking; and restrictions on foreign currency mismatches. In the chapter, we ask whether tighter macroprudential regulation, while strengthening financial stability, can also dampen the impact of global financial shocks on economic activity in emerging…”

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