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The Metamorphosis of Finance and Capital Flows to Emerging Market Economies

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  • Otaviano Canuto

Abstract

The decade after the Great Financial Crisis of 2007–09 brought significant changes in the volume and composition of capital flows in the global economy. Portfolio investments and other non-bank financial intermediaries are responsible for an increasing share of foreign capital flows, while banking flows have shrunk in relative terms. This paper considers the implications of such a metamorphosis of finance for capital flows to emerging market economies (EMEs). After examining capital flows from the global financial crisis to the 2020-21 pandemic crisis, we analyze the extent to which a normalization of monetary policies in advanced economies may lead to shocks in those flows, as well as why exchange rate fluctuations between the U.S. dollar and other major currencies can affect capital flows to EMEs. Finally, we assess the range of policy instruments that EME policymakers tend to resort to manage risks derived from capital-flow volatility.

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  • Otaviano Canuto, 2021. "The Metamorphosis of Finance and Capital Flows to Emerging Market Economies," Research papers & Policy papers on Economic Trends and Policies 2141, Policy Center for the New South.
    • Handle: RePEc:ocp:rpaeco:pp_24-21
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    References listed on IDEAS

    as
    1. Boris Hofmann & Taejin Park, 2020. "The broad dollar exchange rate as an EME risk factor," BIS Quarterly Review, Bank for International Settlements, December.
    2. Sebastian Edwards, 2021. "Macroprudential Policies and The Covid-19 Pandemic: Risks and Challenges For Emerging Markets," NBER Working Papers 29441, National Bureau of Economic Research, Inc.
    3. Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(2), pages 155-192, July.
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