Emerging Markets (EMs) are more likely to suffer shocks, such as commodity-price and terms-of-trade shocks, as well as surges and sudden stops in capital flows.. Furthermore, structural and institutional features typical of most EMs tend to amplify and propagate shocks. Even when asset price-led cycles are not generated within EMs, they tend to be affected the most due to capital flows.
The 2008 financial crisis has emphasized the importance of macro financial linkages. In the financial sector, attention is now focusing on macro prudential regulations that are geared toward the stability of the financial system as a whole. In the macro arena, the recognition that price stability was not sufficient to guarantee macroeconomic stability and that financial imbalances developed despite low inflation and small output gaps has highlighted the need for additional tools (macro prudential policies) to complement monetary policy in countercyclical management. Emerging markets (EMs) face different conditions and have key structural features that can have a bearing on the relevance and efficacy of policy measures. Drawing on Canuto, Otaviano, and Swati R. Ghosh, eds. 2013. Dealing with the Challenges of Macro Financial Linkages in Emerging Markets. Washington, DC: World Bank), this note discusses the challenges of dealing with macro financial linkages and explores the policy toolkit available for dealing with systemic risks, particularly in the context of EMs.
Confidence in conventional financial stability regimes was shattered by the scale of the financial crisis. This book chapter explores the need for coordination between monetary policies and macro prudential…
The 2008 financial crisis highlighted the challenges associated with global financial integration, emphasized the importance of macro financial linkages and challenged pre-crisis financial stability regimes.
The mid-year season was marked by a strong pressure of capital outflows and exchange rate devaluations in several systemically relevant emerging market economies. Announcements in May that the Federal Reserve had started to focus on phasing out its asset-purchase program – otherwise known as quantitative easing or (QE) sparked a surge in bond yields that in turn triggered an asset sell-off in those emerging markets. Although subsiding in September, particularly after the Fed announced that “tapering” would not begin yet, concerns remain about what will happen when the actual unwinding of QE eventually unfolds. We argue here that events since May could ideally provide a “fire drill” that might induce emerging markets to address various policy shortcomings that have been exacerbated by the flood of global liquidity in the last few years.
While unconventional monetary policies have been appropriately anti-cyclical in ACs implementing them, they have had inappropriately pro-cyclical consequences on EMs -- boosting credit and demand when most economies among the latter were already heated up, and threatening to accentuate a slowdown where it started to happen.
The adjustment to the “normalization” of the US monetary policy may end up being not as disruptive as many analysts are expecting. It will depend on the pace of recovery in the US economy and/or the smoothness of China’s adjustment-cum-slowdown . However, to fully overcome the current turmoil, EMs must not lose sight of their country-specific reform agendas.
China and Brazil are both facing a growth slowdown, as compared to the period prior to the global financial crisis. They were both able to respond with aggressive anti-cyclical policies to the post-Lehman quasi-collapse of the global economy. In both cases, such policies led to a growth rebound by reinvigorating previous patterns of growth. This brought forth the exhaustion of such patterns and the need to transit to other growth regimes.
The metamorphosis of the dragon may involve painful growing pains, including the risks of a hard landing that many analysts attribute to the current transition. The forthcoming two decades are setting the next stage of a half-century that could be marked by dramatic economic transformation, creating both challenges and opportunities for China and the rest of the world.
As part of their response to negative shocks coming from advanced economies after the Lehman Brothers’ collapse in 2008, most developing countries resorted to countercyclical fiscal policy. Such a…
Since the 1950s, rapid growth has allowed a significant number of countries to reach middle-income status; yet, very few have made the additional leap needed to become high-income economies. Rather, many developing countries have become caught in what has been called a “middle-income trap”, characterized by a sharp deceleration in growth and in the pace of productivity increases.
The discussions at last month’s G-20 meeting of finance ministers were dominated by anxiety over so-called “currency wars.” But, to escape the crisis, global leaders must shift their focus to channeling the massive liquidity that advanced countries' controversial monetary policies have generated toward long-term investment financing.
"The features of East Asia's experience in transitioning from middle- to high-income status provide important lessons for other countries that are attempting to follow suit."
Since the 1950s, rapid growth has allowed a significant number of countries to reach middle-income status; yet, very few have made the additional leap needed to become high-income economies. Rather, many developing countries have become caught in what has been called a middle-income trap, characterized by a sharp deceleration in growth and in the pace of productivity increases. Drawing on the findings of a recently released working paper (Agénor and Canuto 2012), as well as a growing body of research on growth slowdowns, this note provides an analytical characterization of “middleincome traps” as stable, low-growth economic equilibria where talent is misallocated and innovation stagnates. To counteract middle-income traps, there are a number of public policies that governments can pursue, such as improving access to advanced infrastructure, enhancing the protection of property rights, and reforming labor markets to reduce rigidities—all implemented within a context where technological learning and research and development (R&D) are central to enhancing innovation. Such policies not only explain why some economies—particularly in East Asia—were able to avoid the middle-income trap, but are also instructive for other developing countries seeking to move up the income ladder and reach high-income status.
From hedge funds to mortgage-backed securities, unregulated and risky activities have fallen out of favor since the Lehman Brothers debacle. Aggressive, casino-type behaviors and obscure transactions definitely played an…