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Recent changes in technology, along with the opening up of many regions previously closed to investment, have led to explosive growth in the international movement of capital. Flows from foreign direct investment and debt and equity financing can bring countries substantial gains by augmenting local savings and by improving technology and incentives. Investing companies acquire market access, lower cost inputs, and opportunities for profitable introductions of production methods in the countries where they invest. But, as was underscored recently by the economic and financial crises in several Asian countries, capital flows can also bring risks. Although there is no simple explanation of the currency crisis in Asia, it is clear that fixed exchange rates and chronic deficits increased the likelihood of a breakdown. Similarly, during the 1970s, the United States and other industrial countries loaned OPEC surpluses to borrowers in Latin America. But when the U.S. Federal Reserve raised interest rates to control soaring inflation, the result was a widespread debt moratorium in Latin America as many countries throughout the region struggled to pay the high interest on their foreign loans. International Capital Flows contains recent work by eminent scholars and practitioners on the experience of capital flows to Latin America, Asia, and eastern Europe. These papers discuss the role of banks, equity markets, and foreign direct investment in international capital flows, and the risks that investors and others face with these transactions. By focusing on capital flows' productivity and determinants, and the policy issues they raise, this collection is a valuable resource for economists, policymakers, and financial market participants.
We study the impact of the US quantitative easing (QE) on both the emerging and advanced economies, estimating a global vector error-correction model (GVECM) and conducting counterfactual analyses. We focus on the effects of reductions in the US term and corporate spreads. First, US QE measures reducing the US corporate spread appear to be more important than lowering the US term spread. Second, US QE measures might have prevented episodes of prolonged recession and deflation in the advanced economies. Third, the estimated effects on the emerging economies have been diverse but often larger than those recorded in the US and other advanced economies. The heterogeneous effects from US QE measures indicate unevenly distributed benefits and costs.
The world economy is experiencing a very strong but uneven recovery, with many emerging market and developing economies facing obstacles to vaccination. The global outlook remains uncertain, with major risks around the path of the pandemic and the possibility of financial stress amid large debt loads. Policy makers face a difficult balancing act as they seek to nurture the recovery while safeguarding price stability and fiscal sustainability. A comprehensive set of policies will be required to promote a strong recovery that mitigates inequality and enhances environmental sustainability, ultimately putting economies on a path of green, resilient, and inclusive development. Prominent among the necessary policies are efforts to lower trade costs so that trade can once again become a robust engine of growth. This year marks the 30th anniversary of the Global Economic Prospects. The Global Economic Prospects is a World Bank Group Flagship Report that examines global economic developments and prospects, with a special focus on emerging market and developing economies, on a semiannual basis (in January and June). Each edition includes analytical pieces on topical policy challenges faced by these economies.
The open access publication of this book has been published with the support of the Swiss National Science Foundation. In Monetary Stability as a Common Concern in International Law, Lucía Satragno argues that monetary stability is a global public good that must be promoted and protected at all levels of governance. In doing so, the book accomplishes two tasks. On one hand, it provides an up to date analysis of the role of law and institutions in the international monetary field since the collapse of the Bretton Woods system. On the other hand, it applies the methodological approach proposed by the novel doctrine of Common Concern of Humankind to monetary stability as a case study. Accordingly, the book examines not only the status quo of the international monetary system, but also looks at the ‘new and different realism’ that would be envisaged in monetary affairs in the case of a fully-fledged principle of Common Concern.
Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.
Since the end of the Great Recession in 2009 the central banks of the advanced countries have taken unprecedented actions to reflate and stimulate their economies. There have been significant differences in the timing and pace of these actions. These independent monetary policy actions have had significant spillover effects on the economies and monetary policy strategies of other advanced countries. In addition the monetary policy actions and interventions of the advanced countries have had a significant impact on the emerging market economies leading to the charge of 'currency wars.' The perceived negative consequences of spillovers from the actions of national central banks has led to calls for international monetary policy coordination. The arguments for coordination based on game theory are the same today as back in the 1980s, which led to accords which required that participant countries follow policies to improve global welfare at the expense of domestic fundamentals. This led to disastrous consequences. An alternative approach to the international spillovers of national monetary policy actions is to view them as deviations from rules based monetary policy. In this view a return to rules based monetary policy and a rolling back of the " global great deviation" by each country's central bank would lead to a beneficial policy outcome without the need for explicit policy coordination. In this book we report the results from a recent conference which brought together academics, market participants, and policy makers to focus on these issues. The consensus of much of the conference was on the need for a classic rules based reform of the international monetary system.
Is the Mundell-Fleming trilemma alive and well? International co-movement of asset prices takes place alongside synchronized business cycles, complicating the identification of financial spillovers and assessments of monetary policy autonomy. A benchmark for interest rate comovement is to impose the null hypothesis that central banks respond only to the outlook for domestic inflation and output. We show that common approaches used to estimate interest rate spillovers tend to understate the degree of monetary autonomy enjoyed by small open economies with flexible exchange rates. We propose an empirical strategy that partials out those spillovers that are associated with impaired monetary autonomy. Using this approach, we revisit the predictions of the trilemma and find more compelling evidence that flexible exchange rates deliver monetary autonomy than prior work has suggested.
This book assesses the 2008-2009 financial crisis and its ramifications for the global economy from a multidisciplinary perspective. Current market conditions and systemic issues pose a risk to financial stability and sustained market access for emerging market borrowers. The volatile environment in the financial system became the source of major threats and some opportunities such as takeovers, mergers and acquisitions for international business operations. This volume is divided into six sections. The first evaluates the 2008-2009 Global Financial Crisis and its impacts on Global Economic Activity, examining the financial crisis in historical context, the economic slowdown, transmission of the crisis from advanced economies to emerging markets, and spillovers. The second section evaluates global imbalances, especially financial instability and the economic outlook for selected regional economies, while the third focuses on international financial institutions and fiscal policy applications. The fourth section analyzes the capital market mechanism, price fluctuations and global trade activity, while the fifth builds on new trends and business cycles to derive effective strategies and solutions for international entrepreneurship and business. In closing, the final section explores the road to economic recovery and stability by assessing the current outlook and fiscal strategies.
The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.