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

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.