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Emerging Europe suffered larger output declines during 2008-09 than any other region in the world. However, some countries experienced much smaller declines than others; major balance-ofpayments crises and banking collapses were avoided; and economic policy reactions stayed well clear of populist and confiscatory measures experienced in previous crises. This paper argues that this can be attributed to European economic and political integration. It shows that foreign bank ownership was a mitigating factor in the output decline, and that more than half of the crosscountry variation in output decline can be explained by a small group of macroeconomic vulnerabilities.

Countries have adopted various institutional responses to subnational government borrowing. Using a sample of 43 countries over the period 1982-2000, O ver the past few decades, countries around the world have gradually moved toward the greater decentralization of fiscal revenue and spending responsibilities. As a result, subnational economic policies have taken an increasingly important role in ensuring macroeconomic stability. National governments have adopted different institutional responses to the difficulties of decentralized decision making, especially addressing the need to improve policy coordination across levels of government and contain subnational borrowing. *Alexander Plekhanov is an Economist in the Fiscal Affairs Department of the IMF, and Raju Singh is a Senior Economist in the Asia and Pacific Department of the IMF. This paper was prepared while Mr. Plekhanov was a summer intern and Mr. Singh a Senior Economist in the IMF Fiscal Affairs Department. The authors are grateful to Nicoletta Battini, Jeremy Edwards, Thomas Helbling, Anwar Shah, and an anonymous referee for their comments and suggestions, and to Jamal Ismayilov for excellent research assistance.

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1The paper provides a cross-country empirical analysis of the impact of corruption on foreign direct investment flows. The gravity model augmented with joint effects of corruption in the origin and destination countries determines differentiated patterns of investment flows between countries with various level of control of corruption. The estimates point towards greater investment flows between countries with good control of corruption. Moreover, if control of corruption in the destination country improves, investment flows from cleaner countries rise more than they do from countries with a higher incidence of corruption. The resulting changes in composition of investment volumes towards more investment from cleaner countries may further reinforce the strengthening of economic and political institutions that keep corruption in check. for valuable comments and suggestions.