Policy uncertainty spillovers to emerging markets: Evidence from capital flows
Dennis Reinhardt, Cameron McLoughlin, Ludovic Gauvin 05 November 2014
In the aftermath of the Global Crisis, policymakers and academics alike discussed how uncertainty surrounding macroeconomic policymaking has impacted domestic investment. At the same time, concerns regarding the spillover impact of monetary policy in advanced economies on emerging market economies featured strongly in the international policy debate. This column draws the two debates together, and examines how policy uncertainty in advanced economies has spilled over to emerging markets via portfolio capital flows. It finds remarkable differences in the spillover effects of EU vs. US policy uncertainty.
In the wake of the global financial crisis of 2007–2008, advanced economies experienced heightened levels of uncertainty in macroeconomic policymaking. Against this backdrop, policymakers debated the domestic and global spillover implications of advanced-country policy uncertainty (e.g. IMF 2013). At the same time, the potential for monetary policy settings in advanced countries to spill over to emerging market economies (EMEs) via capital flows was hotly contested in both academic and policymaker circles (e.g. Fratzscher et al. 2013).
International finance Macroeconomic policy Monetary policy
capital flows, Capital inflows, emerging markets, policy uncertainty, spillovers, global crisis, monetary policy, macroeconomic policy, risk aversion, home bias
Do capital controls deflect capital flows?
Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu 23 June 2014
Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.
The size and volatility of capital flows to developing countries have increased significantly in recent years (Figure 1), leading many economists to argue that national policies and multilateral institutions are needed to govern these flows (Forbes and Klein 2013, Blanchard and Ostry 2012). The IMF itself has reviewed its position on the liberalisation and management of capital flows, while recognising that “much further work remains to be done to improve policy coordination in the financial sector” (IMF 2012, p. 28).
China, capital flows, spillovers, South Africa, capital controls, Brazil, Capital inflows, international capital flows
Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets
Barry Eichengreen, Poonam Gupta 19 December 2013
Fed tapering has started. A revival of last summer’s emerging economy turmoil is a real concern. This column discusses new research into who was hit and why by the June 2013 taper-talk shock. Those hit hardest had relatively large and liquid financial markets, and had allowed large rises in their currency values and their trade deficits. Good macro fundamentals did not provide much insulation, nor did capital controls. The best insulation came from macroprudential policies that limited exchange rate appreciation and trade deficit widening in response to foreign capital inflows.
In May 2013, Federal Reserve officials first began to talk of the possibility of the US central bank tapering its securities purchases from $85 billion a month to something lower. A milestone to which many observers point is 22 May 2013, when Chairman Bernanke raised the possibility of tapering in his testimony to Congress. This ‘tapering talk’ had a sharp negative impact on economic and financial conditions in emerging markets.
Three aspects of that impact are noteworthy:
Exchange rates Monetary policy
exchange rates, monetary policy, Federal Reserve, emerging markets, capital controls, Macroprudential policies, Capital inflows, currency war, tapering
Capital inflows and booms in asset prices: Going beyond the current account
Eduardo Olaberría 07 December 2013
Policymakers have long been concerned that large capital inflows are associated with asset-price booms. This column presents recent research showing that the composition of capital inflows also matters. The association between capital inflows and asset-price booms is about twice as strong for debt-related than for equity-related investment. Policymakers should therefore pay attention to the composition of capital inflows, since debt-related inflows may still undermine financial stability even if they do not result in an overall current-account deficit.
For decades, policymakers’ perception has been that large capital inflows can fuel booms in asset prices. If this were true, bonanzas in capital inflows would imply an important risk to financial stability, since booms in asset prices are leading indicators of financial crises. However, as noted by Reinhart and Reinhart (2008: 50), despite being widespread among policymakers, until recently this perception was based mainly on anecdotal evidence.
Financial markets International finance
capital flows, asset prices, current account, bubbles, Capital inflows, booms
Low interest rates and housing booms: The role of capital inflows, monetary policy, and financial innovation
Filipa Sá, Pascal Towbin, Tomasz Wieladek 10 March 2011
In much of the Western world, the decade prior to the global crisis witnessed soaring house prices. While the debate on its causes continues, this column finds that the property booms owed a significant part of their ferocity to large capital inflows and low interest rates.
The run-up to the recent global financial crisis was characterised by an environment of low interest rates and a rapid increase in housing market activity across OECD countries.
International finance Macroeconomic policy Monetary policy
interest rates, house prices, Capital inflows, real estate
The recent surge in capital inflows and policy options for India
Dayanand Arora, Francis Xavier Rathinam , Shuheb Khan 03 July 2010
Despite the recent drop in capital inflows to India, this column argues that once global markets recover from the latest setback, the country will need to contain volatility in foreign portfolio investment. This column provides a detailed analysis of capital inflows to India and policy recommendations for how to deal with them.
Once again, many emerging economies are grappling with a surge in net capital inflows, particularly through increased foreign portfolio investment. And again, managing these volatile capital inflows is back on the policy agenda. This time round, the need for a debate on policy options has gained added fervour because of the changes in the views of the IMF on capital controls. A recent IMF staff position note (Ostry et.al. 2010) concludes:
India, exchange-rate policy, Capital inflows
Managing capital inflows: Emerging Europe is different, again
Johan Mathisen, Srobona Mitra 25 May 2010
In contrast to much of the emerging world, capital inflows to emerging Europe continue to be weak and mixed. How should the region ensure a healthy level of foreign investment while preventing excessive capital inflows and improving the stability of the financial sector? This column argues a comprehensive policy response is needed and recommendations should be tailored to country-specific circumstances.
Capital inflows were larger in emerging Europe and fell more severely during the crisis than in other emerging economies (IMF 2010). Prior to the crisis, cross-border loans from Western European parent banks to their emerging European affiliates accounted for most of the difference (Figure 1). The large inflows created macroeconomic and financial sector vulnerabilities – larger current account deficits, rapid credit growth, worse fiscal positions, and heavier indebtedness (often in foreign currencies) of households in a large part of the region.
Europe's nations and regions
foreign direct investment, financial regulation, Capital inflows, emerging Europe