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Role reversal in global finance

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  • Eswar S. Prasad

Abstract

I document that emerging markets have cast off their "original sin" – their external liabilities are no longer dominated by foreign-currency debt and have instead shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves held in advanced economy government bonds. Given the enormous and rising public debt burdens of reserve currency economies, this means that the long-term risk on emerging markets' external balance sheets is shifting to the asset side. However, emerging markets continue to look for more insurance against balance of payments crises, even as self-insurance through reserve accumulation itself becomes riskier. I propose a mechanism for global liquidity insurance that would meet emerging markets' demand for insurance with fewer domestic policy distortions while facilitating a quicker adjustment of global imbalances. I also argue that emerging markets have become less dependent on foreign finance and more resilient to capital flow volatility. The main risk that increasing financial openness poses for these economies is that capital flows exacerbate vulnerabilities arising from weak domestic policies and institutions.
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Suggested Citation

  • Eswar S. Prasad, 2011. "Role reversal in global finance," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 339-390.
  • Handle: RePEc:fip:fedkpr:y:2011:p:339-390
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    2. Gong Cheng, 2014. "Foreign Reserves, Crises and Growth," Sciences Po publications info:hdl:2441/1tv3m5dr9b9, Sciences Po.
    3. Bruno Bonizzi, 2015. "Capital Market Inflation in Emerging Markets: the Cases of Brazil and South Korea," PSL Quarterly Review, Economia civile, vol. 68(273), pages 115-150.
    4. Tibor Besedeš & Stefan Goldbach & Volker Nitsch, 2017. "You’re banned! The effect of sanctions on German cross-border financial flows," Economic Policy, CEPR;CES;MSH, vol. 32(90), pages 263-318.
    5. Abdulaziz A Hussen, 2020. "Impact of Financial Integration on Ethiopian Economic Growth," Business and Economic Research, Macrothink Institute, vol. 10(1), pages 55-76, March.
    6. Cheng, Gong, 2015. "Balance sheet effects, foreign reserves and public policies," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 146-165.
    7. Philip R. Lane, 2013. "Cross-Border Financial Integration in Asia and the Macro-Financial Policy Framework," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 14(2), pages 37-52, April.
    8. Philip Lane, 2013. "Financial Globalisation and the Crisis," Open Economies Review, Springer, vol. 24(3), pages 555-580, July.
    9. yann Echinard & Jacques Fontanel & Maxence Fontanel, 2013. "BRICS, entre statistique et lobbyisme," Post-Print hal-02196522, HAL.
    10. Tetiana Rodionova, 2013. "Structural Risks of Foreign Liabilities: Impact of Investment Income Repatriation in Emerging Economies," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 20(2), pages 119-129, October.
    11. Duygu Yolcu Karadam & Nadir Ocal, 2014. "Financial Integration and Growth: A Nonlinear Panel Data Analysis," ERC Working Papers 1415, ERC - Economic Research Center, Middle East Technical University, revised Nov 2014.
    12. Andreas Steiner, 2013. "A Tale of Two Deficits: Public Budget Balance of Reserve Currency Countries," IEER Working Papers 97, Institute of Empirical Economic Research, Osnabrueck University.
    13. Maurice Obstfeld, 2013. "Crises and the International System," International Economic Journal, Taylor & Francis Journals, vol. 27(2), pages 143-155, June.
    14. Duygu Yolcu Karadam & Nadir Öcal, 2022. "Analysis of distinct asymmetries in financial integration‐growth nexus for industrial, emerging and developing countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2326-2344, April.
    15. Eswar S. Prasad & Lei Ye, 2011. "The renminbi’s role in the global monetary system," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 127-197.
    16. Peter Montiel, 2014. "Capital Flows: Issues and Policies," Open Economies Review, Springer, vol. 25(3), pages 595-633, July.
    17. Gong Cheng, 2014. "Foreign Reserves, Crises and Growth," Sciences Po publications info:hdl:2441/1tv3m5dr9b9, Sciences Po.
    18. Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series iiisdp438, IIIS.
    19. Maurice Obstfeld, 2014. "Never Say Never: Commentary on a Policymaker’s Reflections," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(4), pages 656-693, November.

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    More about this item

    Keywords

    Globalization; Emerging markets; International finance;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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