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Financial Stress in Emerging Markets: The Tail-Risk Trade-Offs Between Growth and Financial Stability Policies

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  • David de Villiers

  • Hylton Hollander

  • Dawie Van Lill

Abstract

We apply quantile regressions to analyse how macroprudential policies and capital controls affect the spillover of financial stress on future economic growth in emerging markets. Our findings reveal a key intertemporal trade-off: macroprudential policies, while dampening short-term growth, enhance economic resilience and support long-term growth. In contrast, capital controls do not present this trade-off and are most effective during periods of strong economic performance. The results suggest that shrinking economies should prioritize domestic financial stability, while growing economies should focus on protecting against external financial instability. We contribute to the literature by refining and extending the financial stress indicator for a group of 27 emerging markets from 1996Q1 to 2022Q4 and demonstrate the distinct roles of these policies across different stages of the economic growth distribution.

Suggested Citation

  • David de Villiers & Hylton Hollander & Dawie Van Lill, "undated". "Financial Stress in Emerging Markets: The Tail-Risk Trade-Offs Between Growth and Financial Stability Policies," ERSA Working Paper Series v::y:2025:i::id:146, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:v::y:2025:i::id:146
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    References listed on IDEAS

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    1. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2020. "Financial Spillovers and Macroprudential Policies," Open Economies Review, Springer, vol. 31(3), pages 529-563, July.
    2. Lloyd, Simon & Fernández-Gallardo, Álvaro & Manuel, Ed, 2023. "The transmission of macroprudential policy in the tails: evidence from a narrative approach," ESRB Working Paper Series 145, European Systemic Risk Board.
    3. Cerutti, Eugenio & Claessens, Stijn & Laeven, Luc, 2017. "The use and effectiveness of macroprudential policies: New evidence," Journal of Financial Stability, Elsevier, vol. 28(C), pages 203-224.
    4. Tobias Adrian & Federico Grinberg & Nellie Liang & Sheheryar Malik & Jie Yu, 2022. "The Term Structure of Growth-at-Risk," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 283-323, July.
    5. Ravi Balakrishnan & Stephan Danninger & Selim Elekdag & Irina Tytell, 2011. "The Transmission of Financial Stress from Advanced to Emerging Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 40-68, May.
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