4. Policies in Emerging Economies for Coping with Heightened Risk During Recovery
- International Monetary Fund. European Dept.
- Published Date:
- September 2009
Emerging Europe is likely to face higher risk premiums and a more volatile environment in the aftermath of the financial crisis. While the global crisis might be receding, investors are paying increased attention to domestic factors and policies, creating significant cross-country differences in sovereign spreads. Higher and more volatile spreads increase the variability of inflation and output over the cycle, with further deleterious effects on investment, growth, and prospects for convergence. Restoring the normal functioning of the financial system where needed, and strengthening financial stability and fiscal sustainability frameworks will go a long way toward addressing these concerns. Such policies could yield a “double dividend” by lowering the volatility of the business cycle and improving prospects for long-term growth.