Can emerging market central banks bail out banks? A cautionary tale from Latin America

This paper investigates whether emerging market countries can implement monetary policies to cope with financial crises as advanced countries did during the recent global crisis-injecting significant amounts of money into the financial system without facing major short-run adverse macroeconomic repercussions. Using panel data techniques, the paper analyzes episodes of financial turmoil in 16 Latin American countries during 1995-2007. The results show that developing and emerging market countries should be cautious because injecting money on a large scale into the financial system may fuel further macroeconomic instability, increasing the chances of simultaneous currency crises.