Unconventional Monetary Policy Normalization in High-Income Countries : Implications for Emerging Market Capital Flows and Crisis Risks
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World Bank, Washington, DC
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As the recovery in high-income countries
firms amid a gradual withdrawal of extraordinary monetary
stimulus, developing countries can expect stronger demand
for their exports as global trade regains momentum, but also
rising interest rates and potentially weaker capital
inflows. This paper assesses the implications of a
normalization of policy and activity in high-income
countries for financial flows and crisis risks in developing
countries. In the most likely scenario, a relatively orderly
process of normalization would imply a slowdown in capital
inflows amounting to 0.6 percent of developing-country GDP
between 2013 and 2016, driven in particular by weaker
portfolio investments. However, the risk of more abrupt
adjustments remains significant, especially if increased
market volatility accompanies the unwinding of unprecedented
central bank interventions. According to simulations, abrupt
changes in market expectations, resulting in global bond
yields increasing by 100 to 200 basis points within a couple
of quarters, could lead to a sharp reduction in capital
inflows to developing countries by between 50 and 80 percent
for several months. Evidence from past banking crises
suggests that countries having seen a substantial expansion
of domestic credit over the past five years, deteriorating
current account balances, high levels of foreign and
short-term debt, and over-valued exchange rates could be
more at risk in current circumstances. Countries with
adequate policy buffers and investor confidence may be able
to rely on market mechanisms and countercyclical
macroeconomic and prudential policies to deal with a
retrenchment of foreign capital. In other cases, where the
scope for maneuver is more limited, countries may be forced
to tighten fiscal and monetary policy to reduce financing
needs and attract additional inflows.
Palabras clave
ACCOUNTING, AGRICULTURAL COMMODITY, ASSET PRICE, ASSET PRICES, BALANCE OF PAYMENT, BALANCE OF PAYMENTS, BALANCE SHEET, BANK BALANCE SHEETS, BANK LENDING, BANK LOANS, BANKING CRISES, BANKING CRISIS, BANKING SECTOR, BASIS POINTS, BOND FLOWS, BOND ISSUANCE, BOND SPREADS, BOND YIELDS, BONDS, BUSINESS CYCLES, CAPITAL ACCOUNT, CAPITAL ACCOUNTS, CAPITAL FLOW, CAPITAL FLOWS, CAPITAL INFLOW, CAPITAL INFLOWS, CAPITAL OUTFLOW, CAPITAL OUTFLOWS, CENTRAL BANK, CENTRAL BANKS, COMMODITY PRICES, CREDIT EXPANSION, CREDIT EXPANSIONS, CREDIT GROWTH, CREDIT QUALITY, CREDIT RATINGS, CREDIT RISK, CREDIT RISKS, CREDITORS, CRISIS COUNTRIES, CURRENCY CRISES, CURRENCY CRISIS, CURRENCY DEPRECIATION, CURRENCY DEPRECIATIONS, CURRENCY MISMATCH, CURRENT ACCOUNT DEFICITS, DEBT CRISES, DEBT CRISIS, DEBT RATIO, DEBT RATIOS, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DOMESTIC BOND, DOMESTIC CREDIT, DOMESTIC CURRENCIES, DOMESTIC FINANCIAL MARKETS, DUMMY VARIABLE, DUMMY VARIABLES, EMERGING ECONOMIES, EMERGING MARKET, EMERGING MARKET BOND, EMERGING MARKET ECONOMIES, EMERGING MARKETS, EQUITY FLOWS, EQUITY ISSUANCE, EQUITY ISSUANCES, EQUITY MARKETS, EXCHANGE RATE, EXCHANGE RATE MOVEMENTS, EXCHANGE RATES, EXTERNAL DEBT, FEDERAL RESERVE, FEDERAL RESERVE BANK, FEDERAL RESERVE SYSTEM, FINANCIAL ASSETS, FINANCIAL CONTAGION, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DEVELOPMENTS, FINANCIAL EXPOSURE, FINANCIAL FLOWS, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL RISK, FINANCIAL SHOCKS, FINANCIAL STABILITY, FINANCIAL STRESS, FINANCIAL SYSTEM, FISCAL POLICIES, FIXED INCOME, FIXED INCOME PORTFOLIOS, FLEXIBLE EXCHANGE RATE, FLOATING EXCHANGE RATES, FOREIGN CAPITAL, FOREIGN CURRENCIES, FOREIGN CURRENCY, FOREIGN DIRECT INVESTMENT, FOREIGN DIRECT INVESTMENTS, FOREIGN EXCHANGE, FOREIGN EXCHANGE MARKETS, FOREIGN EXCHANGE RESERVES, FOREIGN INVESTORS, GLOBAL BOND, GLOBAL CAPITAL, GLOBAL ECONOMY, GLOBAL FINANCIAL STABILITY, GLOBAL MARKET, GLOBAL TRADE, GLOBALIZATION, GOVERNMENT BOND, GOVERNMENT BOND YIELDS, GOVERNMENT BONDS, GOVERNMENT FINANCING, INDEBTEDNESS, INFLATION, INFLATIONARY PRESSURES, INSTITUTIONAL INVESTOR, INSTITUTIONAL INVESTORS, INTEREST RATE, INTEREST RATE CHANGES, INTEREST RATE DIFFERENTIAL, INTEREST RATE DIFFERENTIALS, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL BANK LENDING, INTERNATIONAL CAPITAL, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCE, INTERNATIONAL FINANCIAL INSTITUTIONS, INTERNATIONAL SETTLEMENTS, INVESTMENT CLIMATE, INVESTMENT RATES, INVESTOR CONFIDENCE, ISSUANCES, LABOR MARKETS, LENDING PORTFOLIO, LEVEL OF DEBT, LIQUIDITY, LIQUIDITY RISKS, LOAN, LOAN QUALITY, LONG-TERM DEBT, LONG-TERM INTEREST, LONG-TERM INTEREST RATE, LONG-TERM INTEREST RATES, MACROECONOMIC POLICIES, MACROECONOMIC POLICY, MACROECONOMIC STABILIZATION, MARKET ACCESS, MARKET CONDITIONS, MARKET CONFIDENCE, MARKET MECHANISMS, MARKET RISKS, MONETARY AUTHORITIES, MONETARY FUND, MONETARY POLICIES, MONETARY POLICY, MONEY SUPPLY, MORTGAGE, MORTGAGE-BACKED SECURITIES, MUTUAL FUND, MUTUAL FUNDS, NONPERFORMING LOANS, OPEN ECONOMIES, OUTSTANDING CREDIT, PENSION, POLICY RESPONSE, POLITICAL ECONOMY, PORTFOLIO, PORTFOLIO FLOWS, PORTFOLIO INFLOWS, PORTFOLIO INVESTMENT, PORTFOLIO INVESTMENTS, POST-CRISIS PERIOD, POST-CRISIS PERIODS, PRIVATE CAPITAL, PRIVATE CAPITAL INFLOW, PRIVATE CAPITAL INFLOWS, PRIVATE CREDIT, PUSH FACTORS, RATE OF RETURN, REAL EXCHANGE RATE, REAL INTEREST, REAL INTEREST RATE, REPAYMENT, RESERVES, RETURN, RISK ASSESSMENTS, RISK AVERSION, RISK FACTORS, SECONDARY MARKETS, SHORT TERM DEBT, SHORT-TERM DEBT, SHORT-TERM EXTERNAL DEBT, SHORT-TERM INTEREST RATE, SHORT-TERM INTEREST RATES, SOLVENCY, SOVEREIGN DEBT, STOCK MARKET, STOCK MARKET VOLATILITY, SWAP, SWAPS, TOTAL DEBT, TRADING, TRANSACTION, TREASURY, TREASURY BILLS, WITHDRAWAL, WORLD MARKET INTEGRATION, YIELD CURVE