Rabah Arezki, Yang Liu, 30 September 2021

Covid-19 has further exposed the growing interdependence between advanced economies and emerging markets. Most of the existing research on cross-border spillovers has focused on the spillover effects from advanced economies to emerging markets. This column shows that spillovers from emerging markets to advanced economies over the past 25 years are about a fifth of those running in the opposite direction, and have increased significantly over time because of the evolving interdependence between these blocks. 

Enrique Alberola, Carlos Cantú, Paolo Cavallino, Nikola Mirkov, 12 July 2021

Textbook models predict that a monetary policy tightening should lift the exchange rate. Yet the empirical evidence for emerging market economies fails to support this prediction. This column uses data from Brazil to show that the exchange rate’s response to monetary policy shocks changes with the fiscal regime. A contractionary monetary surprise leads to an appreciation in normal times. By contrast, a depreciation results when fiscal fundamentals are deteriorating and markets worry about debt sustainability. 

Cathérine Casanova, Beatrice Scheubel, Livio Stracca, 04 June 2021

Since the Global Crisis, the channels of capital flows have changed significantly. This column analyses key trends and underlying drivers of capital flows since the Global Crisis, including the policy trade-offs. It documents the increasing importance of market-based funding, a growing reliance on domestic currency liabilities, and a less stable foreign direct investment environment, particularly for emerging market economies. Although these changes create risks which should be managed, capital flows also present clear benefits for stimulating economic performance and efficiency. 

Michele Ca' Zorzi, Luca Dedola, Georgios Georgiadis, Marek Jarociński, Livio Stracca, Georg Strasser, 25 May 2021

There is growing need to understand the international dimension of monetary policy. This column argues that ECB and Federal Reserve monetary policy decisions spill over to other countries asymmetrically. At the bilateral level, the Fed’s impact on the euro area is material to firms’ financial conditions and economic activity. Conversely, the impact of the ECB’s actions on the US economy is minimal. On a global scale, both central banks’ monetary policies matter for other countries, but the Fed’s monetary policy has a more sizeable impact, particularly on foreign financial variables, such as corporate bond spreads.

Viral Acharya, Siddharth Vij, 29 April 2021

Emerging market economies increasingly rely on foreign currency debt, leaving borrowing firms exposed to sudden stops and currency depreciations. This column examines the dynamics of corporate foreign currency borrowing in India using new firm-level data. It finds that interest rate differentials are a strong predictor of foreign currency debt issuance, particularly after the Global Crisis. After the ‘taper tantrum’ of 2013, the Reserve Bank of India introduced new macroprudential policies that were effective at mitigating the riskiest borrowing and reducing the vulnerability of Indian firms. 

Robert Gilhooly, Carolina Martinez, Abigail Watt, 13 April 2021

Emerging markets will be shaped by the US and Chinese policy stances in 2021. This column considers how the latest US fiscal package will interact with China’s policy normalisation and concludes that while President Biden’s American Rescue Plan should dominate a less expansionary stance in China, the boost to the global economy will be much more modest than one would typically expect. Specifically, the normalisation of goods consumption in developed markets and less import-intensive Chinese growth will curtail global goods trade, a key determinant of emerging market growth.

Yasin Mimir, Enes Sunel, 05 April 2021

Central banks in emerging economies deployed asset purchases for the first time to respond to the Covid-19 shock. Initial studies have found quantitative easing reduced long-term bond yields in these economies without creating bouts of currency depreciation. This column argues that asset purchases ease financial conditions in emerging economies by curbing capital outflows enabled by stronger bank balance sheets upon the asset intermediation by the central bank. If asset purchases cause a de-anchoring in inflation expectations, their effectiveness diminishes. Counterfactual policy experiments reveal that bond yield reductions from asset purchases during the pandemic could have persisted only under large-sized programmes that are representative of advanced economies.

Avinash Persaud, 01 April 2021

The servicing and rolling over of the public and private debt of middle-income countries is a major point of COVID-19-induced stress in the global economy. The G20’s Debt Service Suspension Initiative is a worthy initiative, but it does not address this issue. This column outlines three related steps that may help avoid a crisis. The centre-piece is recycling new and unused Special Drawing Rights for debt reduction through the repayment or repurchase of debt. Moral hazard can be addressed by reducing only those debts held by official creditors and up to an amount equal to fiscal expenditures relating to natural disasters – COVID-19 and climate change, principal amongst them.  

Timo B. Daehler, Joshua Aizenman, Yothin Jinjarak, 15 November 2020

Covid-19 was predicted to hit emerging markets particularly hard, as many containment measures were deemed less effective in an emerging market context. This column examines emerging market sovereign credit default swaps spreads during the pandemic and assesses the relative importance of global factors, sovereign fundamentals, COVID-19 mortality, and policy responses. The analysis suggests that while emerging market sovereign CDS spreads can be explained by regional and global risk factor before COVID-19, they were driven by fiscal space, commodity revenues and mobility dynamics during the pandemic, but not directly through variation in country-specific COVID-19 mortality rates.

Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran, Mehdi Raissi, Alessandro Rebucci, 19 October 2020

The Covid-19 pandemic is unprecedented in its global reach and impact, posing formidable challenges to policymakers and to the empirical analysis of its direct and indirect effects within the interconnected global economy. This column uses a ‘threshold-augmented multi-country econometric model’ to help quantify the impact of the Covid-19 shock along several dimensions. The results of the analysis show that the global recession will be long lasting, with no country escaping its impact regardless of their mitigation strategy. These findings call for a coordinated multi-country policy response to the pandemic.

Emine Boz, Camila Casas, Georgios Georgiadis, Gita Gopinath, Helena Le Mezo , Arnaud Mehl, Tra Nguyen, 09 October 2020

Most global trade transactions are invoiced in just a few currencies, regardless of the countries involved in the transaction. This column presents a new dataset that offers a comprehensive and up-to-date understanding of trade invoicing patterns within the major currencies. It finds that vehicle currency use has been on the rise, with dollar invoicing increasing over time despite the decline in the share of global trade accounted for by the US, and euro invoicing also rising among certain countries (typically at the expense of the dollar). 

Gaston Gelos, Umang Rawat, Hanqing Ye, 20 August 2020

Emerging markets and developing countries are particularly vulnerable to economic shocks such as that posed by COVID-19, not least because of their often weaker monetary policy frameworks. This column discusses the extent to which these economies have been able to react to the crisis with a loosening of monetary policy. While the initial inflation level is an important determinant of a country’s ability to cut rates, additional institutional factors can also affect their ability to conduct countercyclical monetary policy during the crisis.   

Katharina Bergant, Francesco Grigoli, Niels-Jakob Hansen, Damiano Sandri, 12 August 2020

The vulnerability of emerging markets to global financial shocks leads to recurrent calls for policymakers to deploy additional policy tools besides relying on exchange rate flexibility. This column presents evidence that a more stringent level of macroprudential regulation can considerably dampen the effects of global financial shocks on economic activity in emerging markets. A possible channel through which macroprudential regulation enhances macroeconomic resilience is by allowing for a more countercyclical monetary policy response. The authors do not find evidence that capital flow restrictions provide similar benefits.

Reinout De Bock, Dimitris Drakopoulos, Rohit Goel, CFA, Lucyna Gornicka, Evan Papageorgiou, Patrick Schneider, Can Sever, 19 August 2020

The COVID-19 pandemic caused an unprecedented sharp reversal of portfolio flows in emerging and frontier markets, triggering concerns about financial stability and consequently, strong policy responses. This column uses a novel analytical framework, the capital-flows-at-risk methodology, to show that changes in global financial conditions tend to influence portfolio flows more during surges and reversals than in normal times. Furthermore, stronger domestic fundamentals do not necessarily lead to surges in portfolio flows but help mitigate outflows. Hence, the weaker growth outlook for emerging markets due to COVID-19 will worsen local currency flows, while global financial conditions will affect hard currency flows.

Thorsten Beck, 11 August 2020

Survey responses from early April across nearly 500 listed firms in ten emerging markets reveal that the vast majority of firms have been negatively affected by COVID-19 and reacted by reducing investment rather than payrolls. Thorsten Beck (Cass Business School) talks to Tim Phillips about “COVID-19 in emerging markets: firm-survey evidence”, from Covid Economics, Vetted and Real-Time Papers 38, July .

Thorsten Beck, Burton Flynn, Mikael Homanen, 22 July 2020

Most of the evidence on firm-level impact of COVID-19 so far has been for advanced economies. Using survey responses from early April across nearly 500 listed firms in ten emerging markets, this column reveals that the vast majority of firms have been negatively affected by COVID-19 and reacted by reducing investment rather than payrolls. Moreover, it finds that there is a surprising degree of support vis-à-vis employees, customers, other stakeholders and broader society. Stakeholder-centric firms experienced lower stock price declines during the crisis drawdown.

Gianluca Benigno, Jon Hartley, Alicia García-Herrero, Alessandro Rebucci, Elina Ribakova, 29 June 2020

Emerging economies are fighting COVID-19 and the economic sudden stop imposed by the containment and lockdown policies, in the same way as advanced economies. However, emerging markets also face large and rapid capital outflows as a result of the pandemic. This column argues that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimising the risks of large depreciations and spiralling inflation. 

Alicia García-Herrero, Elina Ribakova, 21 May 2020

The spread of COVID-19 and its associated impacts have again brought into focus the dependence of emerging market economies on external financing. This column analyses the factors that put emerging economies at an increased risk of a sudden reduction in dollar liquidity as a consequence of the COVID-19 outbreak. Based on this analysis, it reviews the key tools at the disposal of emerging economies, the Fed, and the IMF to address this problem. It concludes by offering some policy recommendations on the pecking order that could be followed to potentially shield the emerging economies from the dollar shortage problems related to COVID-19.

Kevin Daly, Tadas Gedminas, Clemens Grafe, 20 May 2020

Although the COVID-19 crisis is a global phenomenon, emerging market economies are in a weaker position than developed economies to absorb its fiscal costs. This column assesses the impact of the crisis on government deficits and debt levels in emerging markets, and the fiscal adjustments that are likely to be required in the aftermath of the crisis. The findings suggest that median government debt will rise by around ten percentage points of GDP and that most emerging economies will face painful post-crisis adjustments. The results also imply a strikingly wide range of outcomes across emerging economies around the world.

Erica Bosio, Simeon Djankov, 06 May 2020

With lockdown measures in place almost worldwide now, cash-flow represents a significant concern for firms across multiple sectors. It remains to be seen exactly which types of business will be able to weather the coming storm. This column estimates the survival time of nearly 7,000 firms in a dozen Southern European and emerging market economies. Under the assumptions that firms have no incoming revenues, the median survival time across industries ranges from 8 to 19 weeks. Once collapsed export demand is taken into account, the median survival time falls to between 8 and 14 weeks.

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