A doom loop
Akinci and al., in this paper, provide an assessment of the macroeconomic effects of the COVID-induced sudden stop of capital flows to emerging market economies (EMEs), using an open-economy DSGE model.
- The model predicts output losses in EMEs due in part to the adverse effect of local currency depreciation on private-sector balance sheets with dollar debts. These adverse effects are estimated to be much larger if the capital outflow pressure remains elevated, with the drag on EME GDP reaching nearly 6 percent by mid-2021.
- The financial stresses in EMEs, in turn, spill back to the U.S. economy, through both trade and financial channels. In particular, the model predicts U.S. GDP declines by about 0.75 percent below the baseline solely due to the trade channel in the scenario in which EME capital outflow pressures persist.
Modeling the Global Effects of the COVID-19 Sudden Stop in Capital Flows
By: Ozge Akinci, Gianluca Benigno, Albert Queralto – Federal Reserve Bank of New York, Federal Reserve Board
A new metric that serves as an early warning of EME financial and economic stress
This paper introduces a new financial vulnerability index for emerging market economies by exploiting key differences in their business cycles relative to those of advanced economies. Information on the domestic price of risk, cost of dollar hedging and market-based measures of bank vulnerability combine to generate indexes significantly more effective in capturing macro-financial vulnerability and stress compared to those based on information in trade and global factors. Our index significantly augments early warning surveillance capacity, as evidenced by out-of sample forecasting gains around a majority of turning points in GDP growth relative to distributed lag models that are augmented with information from macro-financial indexes that are custom-built to optimize such forecasts.
Financial Vulnerability and Risks to Growth in Emerging Markets
Authors: Viral V. Acharya, Soumya Bhadury, Jay Surti
From: New York University, Reserve Bank of India, IMF
