Globalisation and monetary policy in emerging markets (original) (raw)

The global crisis and financial intermediation in emerging market economies

2000

In terms of the implications for emerging market economies, the recent global financial crisis has had two main stages. The first stage, between the last quarter of 2007 and the collapse of Lehman Brothers, was characterised by important capital inflows and the second, post-Lehman, stage was associated with a rapid and severe deterioration of external conditions. The management of the crisis by emerging market central banks required, in both stages, a combination of conventional and unconventional monetary policy measures due to the need to preserve the monetary policy transmission mechanism. It is interesting to note that in several countries, including Peru, the sequence of monetary policy adoption began with the set of unconventional measures due to the weakening of the interest rate channel during the high uncertainty period in the last quarter of 2008.

Are Countries Losing Control of Domestic Financial Conditions?

How much influence do countries retain over their domestic financial conditions in a globally integrated financial system? This question has recently been attracting increased interest in policy and academic circles alike. Financial conditions broadly refer to the ease of obtaining finance, and measuring them can be valuable for appraising the impact of policy and economic prospects. Greater financial integration can complicate the management of domestic financial conditions in several ways. First, policymakers may need to take external factors into greater consideration when pursuing domestic objectives. Second, global financial integration may make it harder for domestic policymakers to control financial conditions at home—for example, it may hamper the transmission of monetary policy. This chapter examines the evolving importance of common global components of domestic financial conditions. It develops financial conditions indices (FCIs) that make it possible to compare a large set of advanced and emerging market economies. It finds that a common component (global financial conditions) accounts for about 20 to 40 percent of the variation in countries' domestic FCIs, with notable heterogeneity across countries. Its importance , however, does not seem to have increased markedly over the past two decades. Global financial conditions loom large, but evidence suggests that, on average, countries still appear to hold sway over their own financial conditions—specifically, through monetary policy. Nevertheless, the rapid speed at which foreign shocks affect domestic financial conditions may also make it difficult to react in a timely and effective manner, if deemed necessary. Given that global financial conditions tend to account for a greater fraction of FCI variability in emerging market economies, these countries, in particular, should prepare for the implications of global financial tightening. Governments can promote domestic financial deepening to enhance resilience to global financial shocks. In particular, developing a local investor base, as well as fostering greater equity-and bond-market depth and liquidity, can help dampen the impact of external financial shocks.

INELASTICITY OF EMERGING ECONOMIES TO FINANCIAL CRISIS

2011

The global financial crisis is attributed to a large scale lending, to subprime borrowers by the small, medium and large private banks, a phenomenon observed in USA. The crisis spread to European countries and the rest of the world. Emerging countries were not totally engulfed by the financial crisis, however shocks were felt not because of the subprime borrowing defaults but were affected due to slump in inward foreign capital flows and fall in exports. Thanks to their well regulated financial system and large domestic market size that induced sustained demand in the market even in the face of global recession. The financial system has provided adequate liquidity generated from internal sources and sustained the economic growth.

SEMINAR on Management of Volatility, Financial Liberalization and Growth in Emerging Economies

2000

In 1995, when contagion from the tequila crisis was spreading in Latin America, both Chile and Colombia were exempt from contagion and presented high rates of economic growth. Many analysts attribute this positive performance to the fact that both had undertaken prudential measures to avoid excessive exposure to short term capital flows and pressures towards excessive real exchange rate appreciation: Both countries were using a reserve requirement on short term foreign indebtedness, crawlingbands, and other instruments for reducing domestic vulnerability to capital flows. The parallelism between Chile and Colombia continued after the Asian crisis. In this period, despite the fact that short-term debt represented only a small share of foreign debt in both countries, vulnerability to the international financial crisis was high. In both, real interest rates rose sharply in 1998 and GDP growth was negative in 1999. The similarities between Chile and Colombia, however, do not go much farther. During the 1990s, GDP growth rates were very high in Chile while in Colombia they were below historical standards. Chile had fiscal surpluses and high private savings, while in Colombia there was a rapidly increasing fiscal deficit and falling domestic savings. This paper presents a comparative analysis of the macroeconomic policies of Chile and Colombia during the 1990s, in particular the exchange rate regimes, the capital account regulations, and the gestation and management of financial crises.