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 this performance? We argue that the main reason was relatively moderate financial account shocks both in terms of magnitude and duration during the global crisis. This was caused by the fact that advanced countries could not fully serve their roles as safe havens during the global crisis. 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 and crises.