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Policy Response to External Shocks: Lessons from the Crisis

Author

Listed:
  • Carlos Capistrán
  • Gabriel Cuadra
  • Manuel Ramos Francia

Abstract

Emerging economies have been subject to abrupt reversals in capital inflows, which have adverse consequences for economic activity and financial stability. An important question for policymakers is how to respond to a sudden loss of external financing and its negative effects on the domestic economy. The experience of emerging economies through the recent financial crisis shows that those economies with relatively better economic fundamentals were able to implement countercyclical policies. This paper provides a simple analytical framework to rationalize this evidence. In particular, it addresses this issue by developing a small-scale macroeconomic model of the New Keynesian type. Numerical exercises illustrate how both credible monetary and fiscal policies increase policymakers’ degrees of freedom to respond to adverse external shocks.

Suggested Citation

  • Carlos Capistrán & Gabriel Cuadra & Manuel Ramos Francia, 2011. "Policy Response to External Shocks: Lessons from the Crisis," Working Papers 2011-14, Banco de México.
  • Handle: RePEc:bdm:wpaper:2011-14
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    File URL: http://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7B965A2B76-3B6D-18E0-5C42-9DD12A6ACDA5%7D.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Juda Agung & Solikin M Juhro & Harmanta & Tarsidin, 2016. "Managing monetary and financial stability in a dynamic global environment: Bank Indonesia s policy perspectives," BIS Papers chapters, in: Bank for International Settlements (ed.), Expanding the boundaries of monetary policy in Asia and the Pacific, volume 88, pages 157-188, Bank for International Settlements.
    2. Baranov, Igor N. & Castro, P. C. & Micic, D. & Salgado, G. B., 2013. "Fiscal Impulse during the 2008 Crisis," Working Papers 809, Graduate School of Management, St. Petersburg State University.
    3. Patrick Ologbenla, 2019. "Fiscal Policy and External Shocks in Nigeria," Journal of Economics and Behavioral Studies, AMH International, vol. 11(1), pages 129-138.

    More about this item

    Keywords

    Reversals in capital flows; emerging economies; monetary policy; fiscal policy.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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