Read more about the article Quantitative easing in emerging market economies

Quantitative easing in emerging market economies

The pandemic global financial shock has sparked the inclusion of QE as a policy tool also available for central banks of EME. Nonetheless: - QE targets are on the yield structures of interest rates. If there are fragilities leading to high basic, short-term interest rates, QE will not get much in terms of results. - QE should not raise concerns about “fiscal dominance”, because otherwise it will be self-defeating. Capital outflow pressures may exacerbate. - A prolonged stay of central banks as buyers in local currency bond markets may distort market dynamics. A permanent role of the central bank as a market maker, especially in primary markets, will impair the development of the domestic financial market. Consideration should also be given to the effect of asset purchase programs on possible overvaluation of assets, as well as on collateral availability in the banking system and its impact on the policy rate transmission

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Read more about the article The Next Financial Crisis

The Next Financial Crisis

More than a decade has passed since the Global Financial Crisis and the age of unconventional monetary policies has not ended. More recently, monetary policy has been eased in 70% of the world economy, negative yielding debt has reached US$ 15 trillion, financial conditions have eased and could ease further. As it tends to happen when very low interest rates and search for yield remain for long, financial system vulnerabilities have continued to build. We may well be on the verge of a new financial crisis. • Where are the key rising vulnerabilities in the global financial system? • Has the rise in debt of emerging and frontier markets spurred by global low interest rates and availability of external finance been matched with corresponding asset creation? • To what extent has heightened trade and policy uncertainty affected financial flows? • What should policymakers do to address rising financial vulnerabilities?

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Read more about the article Elephants and Macro-Financial Linkages

Elephants and Macro-Financial Linkages

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.

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Read more about the article Dealing with the Challenges of Macro Financial Linkages in Emerging Markets

Dealing with the Challenges of Macro Financial Linkages in Emerging Markets

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.

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Read more about the article Emerging Markets and the Unwinding of Quantitative Easing

Emerging Markets and the Unwinding of Quantitative Easing

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.

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Read more about the article QE Tapering as a Wake-up Call for Emerging Markets
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QE Tapering as a Wake-up Call for Emerging Markets

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.

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Read more about the article Emerging Markets Selloff: What’s Next?

Emerging Markets Selloff: What’s Next?

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.

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