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We investigate the impact of institutional quality on shielding emerging
economies from the Global Financial Cycle. Our findings indicate that
countries with a higher rule of law, characterized by superior contract
enforcement and more robust protection of property rights, experience a
less severe tightening of domestic financial and macroeconomic conditions
when faced with adverse global financial shocks. We explain this
outcome through a simplified model that incorporates financial frictions,
showing how strong institutions and effective governance alleviate collateral
constraints and mitigate the effects of global financial pressures
on the domestic economy.
