Emerging Market Cycles: Twin-Balance Sheet Conditions and Macro- Financial Linkages
IMF Working Papers, October 24, 2025
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Bibliographic details
- Authors: Soumya Bhadury, Bhanu Pratap, Jay Surti
- Published: October 24, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229029520.001
Summary and central findings
- Paper examines dynamic linkages between financial conditions and economic growth across 18 major emerging market economies over the last two decades.
- Documents two opposing forces that characterize macro-financial dynamics:
- Growth-enhancing linkage: Easing of domestic financial conditions is associated with stronger near-term GDP growth.
- Growth-inhibiting linkage: The subsequent tightening of financial conditions can adversely impact future growth outcomes.
- Both linkages are statistically significant at high frequencies for nearly half of the countries in the sample.
- The opposing linkages appear to be driven by a weak twin-balance sheets condition of high public debt and external imbalances.
- External factors, notably the global financial cycle, play a crucial role in amplifying the feedback loop between economic growth and financial conditions.
Methodology
- Empirical approach uses a reduced-form multivariate autoregressive state-space model.
- Estimation technique referenced: Kalman filter (as implied by state-space modeling in the subject and keywords).
- Model referred to in keywords as MARSS model and involves model coefficient estimation.
Drivers and amplifiers of macro-financial linkages
- Domestic drivers:
- High public debt (part of the twin-balance sheets condition).
- External imbalances (current account and balance of payments considerations).
- External drivers:
- Global financial cycle identified as a crucial amplifying factor of the feedback loop between economic growth and financial conditions.
Policy-relevant implications (inferred from findings)
- Monitoring and addressing twin-balance sheet vulnerabilities—high public debt and external imbalances—can be central to managing the trade-off between near-term growth boosts from easing financial conditions and subsequent adverse effects from tightening.
- External financial cycle developments should be integrated into macro-financial surveillance for emerging markets given their amplifying role.
Key statistics and publication metadata
- Sample: 18 major emerging market economies.
- Time span: last two decades (as described in the summary).
- Statistical significance: both linkages significant at high frequencies for nearly half of the countries in the sample.
- Pages: 50
- Volume: 2025
- Issue: 216
- Series: Working Paper No. 2025/216
- DOI: https://doi.org/10.5089/9798229029520.001
- Stock No: WPIEA2025216
- ISBN: 9798229029520
- ISSN: 1018-5941
- Authors: Soumya Bhadury, Bhanu Pratap, Jay Surti
- Publication date: October 24, 2025
IMF Working Paper — Emerging Market Cycles: Twin-Balance Sheet Conditions and Macro- Financial Linkages
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