Using a new firm-level dataset with comprehensive information on Asian firms’ FX liabilities, we show that Asia’s nonfinancial corporate sector is vulnerable to a tightening of global financial conditions. Higher global interest rates and exchange rate depreciation increase the probability of default of Asian firms. A 30 percent currency depreciation is associated with a two-notch downgrade in the corporate credit rating (e.g., from A to BBB+), resulting in 7 percent of Asian firms falling into bankruptcy. But the impact is nonlinear—as the firms’ FX liability increases, the balance sheet channel of exchange rate offsets, then dominates, the competitiveness channel. The balance sheet channel offsets the competitiveness channel when the share of U.S. dollar debt is between 10 and 20 percent. We also find that currency depreciation increases firm-level investment on average, but for firms with the share of FX liabilities above 20 percent, investment contracts with depreciation.
During the global financial crisis, many central banks in advanced economies engaged in credit easing. These policies have been perceived as largely successful in reducing stress in financial markets, thus avoiding larger output losses. In this paper, we study empirically whether credit easing is also a viable policy tool to cope with banking crises in emerging and developing economies. We find that credit easing leads to a sharp increase in domestic currency depreciation, high inflation, and a substantial reduction in economic growth in a large panel of emerging and developing economies. For advanced economies, we find the effects to be benign. Our results suggest that emerging and developing economies should be cautious when using credit easing as it may fuel adverse macroeconomic repercussions.
This paper investigates whether developing and emerging market countries can implement monetary policies similar to those used by advanced countries during the recent global crisis - injecting significant amounts of money into the financial system without facing major short-run adverse macroeconomic repercussions. Using panel data techniques, the paper analyzes episodes of financial turmoil in 16 Latin America during 1995-2007. The results show that developing and emerging market countries should be cautious because injecting money on a large scale into the financial system may fuel further macroeconomic instability, increasing the chances of simultaneous currency crises.
This paper assesses empirically the key drivers of private capital flows to a large sample of emerging market economies in the last decade. It analyzes the effect of the global financial cycle, measured by the VIX, on capital flows and investigates the role of fundamentals and country characteristics in mitigating or amplifying its effect. Using interaction models, we find the effect of the VIX to be non-linear. For low levels of the VIX, capital flows are driven by fundamental factors. During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance. Our results also suggest that the effect of global financial conditions on gross private capital flows increases with the host country’s level of financial sector development. Finally, our results imply that countries cannot fully insulate themselves from global financial shocks, unless creating a fragmented global financial system.
This paper analyzes the experiences of emerging market economies (EMEs) that have liberalized capital flows over the past 15 years with respect to macroeconomic performance and risks to financial stability. The results of the panel data regressions indicate that greater openness to capital flows is associated with higher growth, gross capital flows, and equity returns and with lower inflation and bank capital adequacy ratios. The effects vary depending on thresholds. As a potential application of these findings, the paper explores the possible effects of liberalization on China by applying the coefficients of explanatory variables to the corresponding variables of China in 2012–16.
New technologies are driving transformational changes in the global financial system. Virtual currencies (VCs) and the underlying distributed ledger systems are among these. VCs offer many potential benefits, but also considerable risks. VCs could raise efficiency and in the long run strengthen financial inclusion. At the same time, VCs could be potential vehicles for money laundering, terrorist financing, tax evasion and fraud. While risks to the conduct of monetary policy seem less likely to arise at this stage given the very small scale of VCs, risks to financial stability may eventually emerge as the new technologies become more widely used. National authorities have begun to address these challenges and will need to calibrate regulation in a manner that appropriately addresses the risks without stifling innovation. As experience is gained, international standards and best practices could be considered to provide guidance on the most appropriate regulatory responses in different fields, thereby promoting harmonization and cooperation across jurisdictions.
The analysis of coincident and leading indicators can help policymakers gauge the short-term direction of economic activity. While such analysis is well established in advanced economies, it has received relatively little attention in many emerging market and developing economies, reflecting in part the lack of sufficient historical data to determine the reliability of these indicators. This paper presents an econometric approach to deriving composite indexes of coincident and leading indicators for a small open economy, Jordan. The results show that, even with limited monthly observations, it is possible to establish meaningful economic and statistically significant relations between indicators from different sectors of the economy and the present and future direction of economic activity.
COVID-19 has exacerbated concerns about the rise of the robots and other automation technologies. This paper analyzes empirically the impact of past major pandemics on robot adoption and inequality. First, we find that pandemic events accelerate robot adoption, especially when the health impact is severe and is associated with a significant economic downturn. Second, while robots may raise productivity, they could also increase inequality by displacing low-skilled workers. We find that following a pandemic, the increase in inequality over the medium term is larger for economies with higher robot density and where new robot adoption has increased more. Our results suggest that the concerns about the rise of the robots amid the COVID-19 pandemic seem justified.
The era of quantum computing is about to begin, with profound implications for the global economy and the financial system. Rapid development of quantum computing brings both benefits and risks. Quantum computers can revolutionize industries and fields that require significant computing power, including modeling financial markets, designing new effective medicines and vaccines, and empowering artificial intelligence, as well as creating a new and secure way of communication (quantum Internet). But they would also crack many of the current encryption algorithms and threaten financial stability by compromising the security of mobile banking, e-commerce, fintech, digital currencies, and Internet information exchange. While the work on quantum-safe encryption is still in progress, financial institutions should take steps now to prepare for the cryptographic transition, by assessing future and retroactive risks from quantum computers, taking an inventory of their cryptographic algorithms (especially public keys), and building cryptographic agility to improve the overall cybersecurity resilience.
This paper analyzes the impact of global and regional spillovers to GCC equity markets. GCC equity markets were impacted by spillovers from U.S. equity markets despite varying degrees of foreign participation. Spillovers from regional equity markets were also important but the magnitude of the effects were on average smaller than that from mature markets. The results also illustrated episodes of contagion in particular during the recent global financial crisis. The findings suggest that given the degree of openness, and open capital accounts the financial channel is an important source through which volatility is transmitted. In this regard, GCC equity markets are not immune from global and regional financial shocks. These findings refute the notion of decoupling between the GCC equity and global equity markets.
This paper investigates the causes of extreme fluctuations in commodity prices from 1990 to 2010. Analyzing two very distinct commodities-crude oil and fine wine, we find that macroeconomic factors are the main determinants of commodity prices. Although supply constraints have the expected effect, aggregate demand growth is the key factor. The empirical results show that while advanced economies account for more than half of global consumption, emerging economies make up the bulk of the incremental change in demand, thereby having a greater weight in commodity price formation. The results also show that the shift in the composition of aggregate commodity demand is a recent phenomenon.
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