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The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets

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  • Reinhart, Carmen
  • Calvo, Guillermo
  • Fernandez Arias, Eduardo
  • Talvi, Ernesto

Abstract

At the time of writing there were widespread concerns about the health of the U.S. economy. There is conclusive evidence that the pace of growth has slowed, which has prompted the Federal Reserve to cut interest rates on two occasions (a total of 100 basis points thus far). As usual, when faced with this kind of turning point, analysts and policy makers alike wonder whether the United States will achieve a “soft landing” or whether the downturn is more serious and protracted—in the worst scenario, the new weakness could signal the end of the new economy. Furthermore, recent inflation surprises have not been encouraging, as higher-thanexpected inflation numbers may curtail the Federal Reserve’s desire and ability to act countercyclically. In this paper, we do not attempt to provide any insights into what lies ahead for the U.S. economy. Our focus is on gaining a better understanding of how the U.S. business cycle, its associated monetary policy cycle, and their interaction affect developing countries. The question of North-South linkages is hardly a new one; the role of trade and primary commodity markets in linking developed and developing countries has a long history (see, for instance, Prebisch, 1950 and Singer, 1950). The links between debtor and creditor nations are also not new (see Diaz- Alejandro, 1984, Dornbusch, 1985, and Calvo, Leiderman, and Reinhart, 1993). Indeed, what is “new” is that some links that had been thought to be extinct have revived in recent years while some “old” links have weakened. As Bordo and Eichengreen (1998) observe, the decade of the 1990s shares some of the features of an earlier age of globalization and high capital mobility prior to World War I; namely, portfolio capital flows to emerging markets have re-emerged as an important link between northern lenders and southern borrowers. This revival is particularly pronounced in the larger Latin American countries. Some of the traditional links, however, may have weakened, as many countries in Asia and Latin America have successfully diversified their exports away from primary commodities. Hence, terms-of-trade shocks may (in some cases) play a smaller role today than in the past. Both of these observations would suggest that, in general, trade/commodity price links may have weakened while financial links may have become stronger. However, one must be cautious in interpretation owing to the large variation across countries in the degree of trade and capital market integration. While the share of primarycommodities in Mexico’s exports has declined dramatically in the past 30 years, the importance of U.S. markets, owing to NAFTA, has soared, which suggests that the trade channel is quantitatively important in the Mexican case.2 These are the questions we analyze. Our focus is on how developments in the United States affect capital flows and growth in emerging market countries across various regions and country groups.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9075.

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Date of creation: Mar 2001
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Handle: RePEc:pra:mprapa:9075

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References

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  1. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," MPRA Paper 13843, University Library of Munich, Germany.
  2. Eduardo Borensztein & Carmen Reinhart, 1994. "The Macroeconomic Determinants of Commodity Prices," IMF Working Papers 94/9, International Monetary Fund.
  3. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
  4. Marquez, Jaime & McNeilly, Caryl, 1988. "Income and Price Elasticities for Exports of Developing Countries," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 306-14, May.
  5. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
  6. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc.
  7. Reinhart, Carmen & Reinhart, Vincent, 2001. "What hurts most?: G-3 exchange rate or interest rate volatility," MPRA Paper 14098, University Library of Munich, Germany.
  8. Michael D. Bordo & Barry Eichengreen & Jongwoo Kim, 1998. "Was There Really an Earlier Period of International Financial Integration Comparable to Today?," NBER Working Papers 6738, National Bureau of Economic Research, Inc.
  9. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  10. Reinhart, Carmen, 1994. "Devaluation, Relative Prices, and International Trade," MPRA Paper 13708, University Library of Munich, Germany.
  11. Rudiger Dornbusch, 1985. "Policy and Performance Links between LDC Debtors and Industrial Nations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 303-368.
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Citations

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Cited by:
  1. Sebastian Sosa, 2010. "The Influence of "Big Brothers:" How Important Are Regional Factors for Uruguay?," IMF Working Papers 10/60, International Monetary Fund.
  2. Eduardo Levy Yeyati & Ugo Panizza & Ernesto H. Stein, 2003. "The Cyclical Nature of North-South FDI Flows," Research Department Publications 4317, Inter-American Development Bank, Research Department.
  3. Nicolas Melissas, 2009. "On Bid Disclosure in OCS Wildcat Auctions," Working Papers 0905, Centro de Investigacion Economica, ITAM.
  4. Guillermo A. Calvo & Eduardo Fernández-Arias & Ernesto Talvi & Carmen M. Reinhart, 2001. "Growth and External Financing in Latin America," IDB Publications 6490, Inter-American Development Bank.
  5. Alicia Garcia Herrero & Daniel Navia Simon, 2004. "Determinants And Impact Of Financial Sector Fdi To Emerging," International Finance 0403001, EconWPA.
  6. Carmen Reinhart & Guillermo A. Calvo & Eduardo Fernández-Arias & Ernesto Talvi, 2001. "Crecimiento y financiamiento externo en América Latina," Research Department Publications 4278, Inter-American Development Bank, Research Department.
  7. Eduardo A. Cavallo & Christian Daude, 2008. "Public Investment in Developing Countries: A Blessing or a Curse?," IDB Publications 6750, Inter-American Development Bank.
  8. Steven Brakman & Gus Garita & Harry Garretsen & Charles van Marrewijk, 2008. "Unlocking the Value of Cross-Border Mergers and Acquisitions," CESifo Working Paper Series 2294, CESifo Group Munich.
  9. Sebastian Sosa, 2008. "External Shocks and Business Cycle Fluctuations in Mexico," IMF Working Papers 08/100, International Monetary Fund.
  10. Sebastian Sosa & Paul Cashin, 2009. "Macroeconomic Fluctuations in the Caribbean," IMF Working Papers 09/159, International Monetary Fund.
  11. Sandra Lizarazo & Jose Maria Da-Rocha, 2009. "Money, Credit and Default," Working Papers 0908, Centro de Investigacion Economica, ITAM.
  12. Alicia Garcia-Herrero & Daniel Navia Simon, 2006. "Why Banks go to Emerging Countries and What is the Impact for the Home Economy? A Survey," Working Papers 0602, BBVA Bank, Economic Research Department.
  13. John C Bluedorn & Rupa Duttagupta & Jaime Guajardo & Petia Topalova, 2013. "Capital Flows are Fickle," IMF Working Papers 13/183, International Monetary Fund.
  14. Eduardo Levy Yeyati & Ugo Panizza & Ernesto H. Stein, 2003. "La naturaleza cíclica de los flujos norte-sur de inversión extranjera directa," Research Department Publications 4318, Inter-American Development Bank, Research Department.

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