Recent economic and financial events, such as the ‘taper tantrum’, have highlighted again the relevance of global factors in driving capital flows to emerging markets. This column suggests that capital flows to emerging markets move in part due to global push factors. However, sensitivity to these push factors differs greatly across types of flows and emerging markets. How much push factors affect individual emerging markets depends on their local liquidity and the composition of their foreign investor bases. Countries relying more on international funds and global banks are significantly more affected by changes in push factors.
Eugenio Cerutti, Stijn Claessens, Damien Puy, Wednesday, September 9, 2015
Pablo Druck, Nicolas Magud, Rodrigo Mariscal, Sunday, August 16, 2015
The strength of the US dollar can impact the economic activity in emerging economies in various ways. This column argues that appreciation of the dollar mitigates the impact of real GDP growth in emerging markets. The main transmission channel is through an income effect. As the dollar appreciates, commodity prices fall, depressing domestic demand via lower real income, and as a result real GDP in emerging markets decelerates. Emerging markets’ growth is expected to remain subdued, reflecting the expected persistence of the strong dollar.
Orazio Attanasio, Britta Augsburg, Ralph De Haas, Emla Fitzsimons, Heike Harmgart, Costas Meghir, Wednesday, June 17, 2015
There have been intense debates on whether microfinance can lift people out of poverty. Summarising research across seven countries, this column argues that microcredit is a useful financial tool but not a powerful anti-poverty strategy. There are also no significant benefits in terms of education or female empowerment. Yet, microcredit does allow low-income households to better cope with risk and to enjoy greater flexibility in how they earn and spend money.
Nicolas Magud, Sebastián Sosa, Wednesday, May 13, 2015
Emerging markets are not the hot investment prospect they used to be. This column estimates that weaker private investment in these nations is a slowdown after a period of boom rather than an outright slump. Prospects for a recovery of business investment, however, are not promising. Commodity prices are expected to remain weak and external financial conditions are set to become tighter.
Tamon Asonuma, Said Bakhache, Heiko Hesse, Sunday, April 5, 2015
The interest in the implications of sovereign debt home bias on debt sustainability has been growing. This column presents new evidence on this issue using a sample of advanced and emerging markets. Home bias generally reduces the cost of borrowing for both advanced and emerging markets when debt levels are moderate to high. A worsening of market sentiments diminishes the favourable impact of home bias on the cost of borrowing, particularly for emerging markets. In addition, higher home bias is associated with higher debt levels, and with less responsive fiscal policy.
Erlend W Nier, Tahsin Saadi Sedik, Sunday, January 4, 2015
Large and volatile capital flows into emerging economies since the Global Financial Crisis have re-invigorated efforts to unearth the determinants of these flows. This column investigates the interplay between global risk aversion (captured by the VIX) and countries’ characteristics. The authors also explore what policies countries should employ to protect themselves against the volatility of capital flows. The findings indicate that capital flows to emerging markets cannot be controlled without incurring substantial costs.
Brian Pinto, Wednesday, December 17, 2014
Since the Global Crisis, concerns have grown that advanced economies are suffering from secular stagnation. This column discusses the lessons that can be learnt from the economic transition of central and eastern Europe and the emerging-market crises of the late 1990s and early 2000s. Structural reform is particularly costly in the context of a debt overhang and an overvalued exchange rate. However, the crux is not debt restructuring per se, but whether economic governance changes credibly for the better following it.
Ron Alquist, Rahul Mukherjee, Linda Tesar, Monday, December 22, 2014
Foreign direct investment is an essential element in 21st century development strategies. This column discusses new evidence that estimates the importance of financial liquidity as a driver of such flows into emerging-market economies. Financial liquidity considerations are key determinants of the size and ownership structure of these investments.
Irina Balteanu, Aitor Erce, Wednesday, November 12, 2014
The feedback loop between banking crises and sovereign debt crises has been at the heart of recent problems in the Eurozone. This column presents stylised facts on the mechanisms through which banking and sovereign crises combine and become ‘twin’ crises. The results point to systematic differences not only between ‘single’ and ‘twin’ crises, but also between different types of ‘twin’ episodes. The timing of ‘twin’ crises – which crisis comes first – is important for understanding their drivers, transmission channels, and economic consequences.
Kaushik Basu, Barry Eichengreen, Poonam Gupta, Wednesday, November 5, 2014
India was among the hardest hit by the Fed’s ‘taper talks’. This column argues that this impact was large for two reasons. First, India received huge capital flows before 2013. This had made it a convenient target for investors seeking to rebalance away from emerging markets. Second, macroeconomic conditions had worsened, which rendered the economy vulnerable. The measures adopted in response were ineffective in stabilising the financial markets. Implementing a medium-term framework that limits vulnerabilities and restricts spillovers could be more successful.
Dennis Reinhardt, Cameron McLoughlin, Ludovic Gauvin, Wednesday, November 5, 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.
Janine Aron, John Muellbauer, Sunday, September 14, 2014
Due to the adoption of inflation targeting and floating exchange rates, and the elimination of capital controls, exchange rate pass-through – the transmission of exchange rate movements to changes in the domestic price level – has become an increasingly important issue in developing and emerging market economies. This column discusses recent research on this topic, and highlights the frequent misspecifications that produce unreliable empirical estimates.
Christoph Trebesch, Helios Herrera, Guillermo L. Ordoñez, Saturday, September 6, 2014
Financial crises are often credit booms gone bust. This column argues that ‘political booms’, defined as an increase in government popularity, are also a good predictor of financial crises. The phenomenon of ‘political booms gone bust’ is, however, only observable in emerging markets. In these countries, politicians have more to gain from riding the popularity benefits of unsustainable booms.
Christian Daude, Eduardo Levy Yeyati, Monday, September 1, 2014
Central banks’ exchange rate interventions are typically attributed to precautionary, prudential, or mercantilist motives. This column documents the prevalence of an alternative motive – that of stabilising the exchange rate – in emerging markets, where, despite heavy intervention, the Global Crisis saw important deviations of the real exchange rate from its equilibrium value. Exchange rate intervention is shown to be effective, but more so at containing appreciations than depreciations.
Gaston Gelos, Hiroko Oura, Saturday, August 23, 2014
The landscape of portfolio investment in emerging markets has evolved considerably over the past 15 years. Financial markets have deepened and become more internationally integrated. The mix of global investors has also changed, with more money intermediated by mutual funds. This column explains that these changes have made capital flows and asset prices in these economies more sensitive to global financial shocks. However, broad-based financial deepening and improved institutions can enhance the resilience of emerging-market economies.
Pranjul Bhandari, Jeffrey Frankel, Thursday, August 21, 2014
Central banks, especially in developing countries, still seek transparent and credible communication. Yet signalling intentions through forward guidance or commitment sometimes creates undesirable constraints. This column argues that central bank pronouncements phrased in terms of nominal GDP are less likely to run afoul of the supply and trade shocks so common in developing countries, compared to pronouncements phrased in terms of inflation.
Joshua Aizenman, Mahir Binici, Michael M Hutchison, Friday, April 4, 2014
In 2013, policymakers began discussing when and how to ‘taper’ the Federal Reserve’s quantitative easing policy. This column presents evidence on the effect of Fed officials’ public statements on emerging-market financial conditions. Statements by Chairman Bernanke had a large effect on asset prices, whereas the market largely ignored statements by Fed Presidents. Emerging markets with stronger fundamentals experienced larger stock-market declines, larger increases in credit default swap spreads, and larger currency depreciations than countries with weaker fundamentals.
Atish R Ghosh, Jonathan D Ostry, Mahvash Saeed Qureshi, Wednesday, April 2, 2014
In a world of volatile capital flows, emerging markets are increasingly resorting to managing their exchange rates. But does this strategy increase their susceptibility to crisis? This column argues that while intermediate regimes as a class are the most susceptible to crises, ‘managed floats’ – a subclass within such regimes – behave much more like pure floats, with significantly lower risks and fewer crises. ‘Managed floating’, however, is a nebulous concept; a characterisation of more crisis prone regimes suggests that it is not the degree of exchange rate management alone, but the way the exchange rate is managed, that matters. Greater against-the-wind intervention by the central bank to prevent currency overvaluation reduces, while greater intervention to defend an overvalued currency raises, the crisis likelihood.
Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak, Todd Mitton, Tuesday, February 25, 2014
Political connections affect economic outcomes in emerging markets. This column discusses new evidence showing that something similar goes on in the US. Over the ten trading days following the announcement of Timothy Geithner as Treasury Secretary, financial firms with a connection to Geithner experienced a cumulative abnormal return of about 12% relative to other financial sector firms. This reversed when his nomination ran into trouble due to unexpected tax issues.
Kristin Forbes, Wednesday, February 5, 2014
The Federal Reserve’s ‘taper talk’ in spring 2013 has been blamed for outflows of capital from emerging markets. This column argues that global growth prospects and uncertainty are more important drivers of emerging-market capital flows than US monetary policy. Although crises can affect very different countries simultaneously, over time investors begin to discriminate between countries according to their fundamentals. Domestic investors play an increasingly important – and potentially stabilising – role. During a financial crisis, ‘retrenchment’ by domestic investors can offset foreign investors’ withdrawals of capital.