Capital flows during the pandemic: lessons for a more resilient international financial architecture

This paper studies the sudden stop in capital flows that emerging markets have experienced throughout the first months of the pandemic. First, we find that the sudden stop in capital flows has been strongly affected by lower portfolio investments of non-bank financial intermediaries: for many emerging markets, the magnitude of the sudden stop has exceeded that of the Global Financial Crisis. Second, we show that emerging markets have adopted expansionary fiscal and monetary policies to face the sudden stop and the resultant recession; moreover, the use of macroprudential measures and unconventional monetary policy document a wider policy toolkit, compared to other crises. Third, we estimate the adequacy of current IMF resources if emerging markets were hit by a further global sudden stop: we find that the IMF resources are adequate, in case of a moderate sudden stop; in case of a more severe scenario, financing needs of emerging markets could go beyond the IMF’s lending capacity, even after the other layers of the global financial safety net have been deployed.