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How the Flows Change When Interest Rates Are Normalized: Risk to Economic and Financial Stability

In: Fault Lines After COVID-19

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  • Sigridur Benediktsdottir

    (Yale University)

Abstract

Central banks in major economies are increasing interest rates, to combat inflation, after a long period of accommodative monetary policy. During the prolonged period of low interest rates external liabilities of a number of economies have increased fast. This build-up of systemic risk threatens now to materialize as debt service costs increase and refinancing of external debt is becoming prohibitively expensive. This chapter brings together the lessons learned from multiple financial crisis that followed the steep increase in major economies’ policy rates in early 1980s and recent literature on risks emanating from extreme capital flows. Financial indicators, mostly focusing on liability flows, point to high current external imbalances and systemic risk in many emerging and developing economies.

Suggested Citation

  • Sigridur Benediktsdottir, 2023. "How the Flows Change When Interest Rates Are Normalized: Risk to Economic and Financial Stability," Springer Books, in: Robert Z. Aliber & Már Gudmundsson & Gylfi Zoega (ed.), Fault Lines After COVID-19, pages 217-226, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-26482-5_13
    DOI: 10.1007/978-3-031-26482-5_13
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