External Balance Sheets as Countercyclical Crisis Buffers

32 Pages Posted: 14 Jun 2018

See all articles by Joseph P. Joyce

Joseph P. Joyce

Wellesley College - Department of Economics

Date Written: April 3, 2018

Abstract

The external balance sheets of many emerging market countries are distinguished by their holdings of assets primarily in the form of foreign debt and foreign exchange reserves, while their liabilities are predominantly equity, either foreign direct investment or portfolio equity. We investigate the claim that this composition served as a buffer for the emerging markets during the global financial crisis of 2008-09. We use data from a sample of 67 emerging market and advanced economies, and several indicators of the crisis are utilized: GDP growth rates in 2008-09, the occurrence of bank crises and the use of IMF credit. Our results show that those countries that issued FDI liabilities had higher growth rates, fewer bank crises and were less likely to borrow from the IMF. Countries with debt liabilities, on the other hand, had more bank crises and were more likely to use IMF credit. We conclude that the “long debt, short equity” (hold debt assets, issue equity liabilities) strategy of emerging markets did mitigate the effects of the global financial crisis.

Keywords: external assets and liabilities, financial crises

JEL Classification: F3, F4

Suggested Citation

Joyce, Joseph P., External Balance Sheets as Countercyclical Crisis Buffers (April 3, 2018). International Economics and Economic Policy, Vol. 15, No. 2, 2018, Available at SSRN: https://ssrn.com/abstract=3155286 or http://dx.doi.org/10.2139/ssrn.3155286

Joseph P. Joyce (Contact Author)

Wellesley College - Department of Economics ( email )

106 Central Street
Wellesley, MA 02181
United States
781-283-2160 (Phone)
781-283-2177 (Fax)

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