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Near-zero U.S. Interest Rates, Primary Commodity Prices, and Financial Control in Emerging Markets

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  • Ronald I. McKinnon

Abstract

The U.S. Federal Reserve’s monetary policy at the center of the world dollar standard has a first-order impact on global financial stability. However, except in moments of international crises, the Fed focuses inward on domestic American economic indicators and generally ignores collateral damage from its monetary policies in the rest of the world. But this makes the U.S. economy less stable. Currently, ultra-low interest rates on dollar assets ignite waves of hot money into emerging markets by carry traders that generate bubbles in international primary commodity prices and other assets. These bubbles burst when some accident at the center, such as a banking crisis, causes a reflux of the hot money. Ironically, these near-zero interest rates hold back investment in the American economy itself.

Suggested Citation

  • Ronald I. McKinnon, 2014. "Near-zero U.S. Interest Rates, Primary Commodity Prices, and Financial Control in Emerging Markets," Economic and Political Studies, Taylor & Francis Journals, vol. 2(2), pages 3-25, July.
    • Handle: RePEc:taf:repsxx:v:2:y:2014:i:2:p:3-25
    DOI: 10.1080/20954816.2014.11673842
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    Cited by:

    1. Lu, Dong & Liu, Jialin & Zhou, Hang, 2022. "Global financial conditions, capital flows and the exchange rate regime in emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    2. Boubellouta Bilal & Muhammad Shahbaz, 2021. "Comparing the Relationship Between Nominal and Real Effective Exchange Rates During the Last Two Devaluations in Algeria," Global Business Review, International Management Institute, vol. 22(6), pages 1421-1440, December.
    3. He, Qing & Guo, Yongxiu & Yu, Jishuang, 2020. "Nonlinear dynamics of gold and the dollar," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).

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