This paper examines two issues that are central to the macroeconomic implications of large external shock for an emerging market economy. First, the paper examines how capital reversal and credit squeeze can reduce aggregate demand that lead to cascading contraction in employment. Secondly, the paper investigates alternative policy options, when an economy is in the depths of financial crisis. What we chose for analytical purpose is an effective model of Blinder-Bernanke type which is modified in several directions so as to examine how financial shocks produce macroeconomic outcomes in a large class of emerging market economies.
• JEL Classification: E44, E51, F41, G21