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Beyond the literature: what policymakers reveal about financial asset overvaluation?

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  • Menna, Lorenzo
  • Moura, Rubens
  • Tobal, Martin

Abstract

This paper explores how global shocks transmit to emerging market and developing economies (EMDEs) when assets in major financial centers are overvalued. While international organizations and historical experience have long warned about asset overvaluation, academic research has yet to scrutinize its role as a source of global financial vulnerability. Using a panel local projection model and plausibly exogenous shocks, we find that a tightening of global financial conditions raises sovereign spreads in EMDEs and the effect is amplified when assets are overvalued. Strong external balances help cushion this impact, which is particularly important in the current context of elevated volatility.

Suggested Citation

  • Menna, Lorenzo & Moura, Rubens & Tobal, Martin, 2025. "Beyond the literature: what policymakers reveal about financial asset overvaluation?," Finance Research Letters, Elsevier, vol. 86(PC).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pc:s1544612325018318
    DOI: 10.1016/j.frl.2025.108577
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