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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.

Suggested Citation

  • Reinhart, Carmen & Calvo, Guillermo & Fernandez Arias, Eduardo & Talvi, Ernesto, 2001. "The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets," MPRA Paper 9075, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:9075
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    References listed on IDEAS

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    1. Prebisch, Raúl, 1950. "The economic development of Latin America and its principal problems," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 29973, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. 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.
    3. 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.
    4. 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.
    5. Carmen M. Reinhart, 1995. "Devaluation, Relative Prices, and International Trade: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 290-312, June.
    6. Carmen M. Reinhart & Vincent Raymond Reinhart, 2002. "What Hurts Emerging Markets Most? G3 Exchange Rate or Interest Rate Volatility?," NBER Chapters,in: Preventing Currency Crises in Emerging Markets, pages 133-170 National Bureau of Economic Research, Inc.
    7. Fernandez-Arias, Eduardo, 1996. "The new wave of private capital inflows: Push or pull?," Journal of Development Economics, Elsevier, vol. 48(2), pages 389-418, March.
    8. Eduardo Borensztein & Carmen M. Reinhart, 1994. "The Macroeconomic Determinants of Commodity Prices," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 236-261, June.
    9. 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 306-314, May.
    10. 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.
    11. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters,in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
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    Citations

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    Cited by:

    1. Sebastian Sosa & Paul Cashin, 2009. "Macroeconomic Fluctuations in the Caribbean; The Role of Climatic and External Shocks," IMF Working Papers 09/159, International Monetary Fund.
    2. Cavallo, Eduardo & Daude, Christian, 2011. "Public investment in developing countries: A blessing or a curse?," Journal of Comparative Economics, Elsevier, vol. 39(1), pages 65-81, March.
    3. Reinhart, Carmen & Calvo, Guillermo & Fernandez Arias, Eduardo & Talvi, Ernesto, 2001. "Growth and External Financing in Latin America," MPRA Paper 9074, University Library of Munich, Germany.
    4. International Monetary Fund, 2010. "FDI Flows to Low-Income Countries; Global Drivers and Growth Implications," IMF Working Papers 10/132, International Monetary Fund.
    5. Levy Yeyati, Eduardo & Panizza, Ugo & Stein, Ernesto, 2007. "The cyclical nature of North-South FDI flows," Journal of International Money and Finance, Elsevier, vol. 26(1), pages 104-130, February.
    6. Nilufer Ozdemir, 2013. "Effects of Monetary Policy Coordination on Small Open Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(3), pages 124-136, May.
    7. Carmen Reinhart & Guillermo A. Calvo & Eduardo Fernández-Arias & Ernesto Talvi, 2001. "Growth and External Financing in Latin America," Research Department Publications 4277, Inter-American Development Bank, Research Department.
    8. Nicolas Melissas, 2009. "On Bid Disclosure in OCS Wildcat Auctions," Working Papers 0905, Centro de Investigacion Economica, ITAM.
    9. 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.
    10. Alicia Garcia Herrero & Daniel Navia Simon, 2004. "Determinants And Impact Of Financial Sector Fdi To Emerging," International Finance 0403001, EconWPA.
    11. 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.
    12. Sandra Lizarazo & Jose Maria Da-Rocha, 2009. "Money, Credit and Default," Working Papers 0908, Centro de Investigacion Economica, ITAM.
    13. Elizabeth Bucacos, 2015. "Impact of international monetary policy in Uruguay: a FAVAR approach," Documentos de trabajo 2015003, Banco Central del Uruguay.
    14. Sebastian Sosa, 2010. "The Influence of “Big Brothers; ” How Important are Regional Factors for Uruguay?," IMF Working Papers 10/60, International Monetary Fund.
    15. Sebastian Sosa, 2008. "External Shocks and Business Cycle Fluctuations in Mexico; How Important are U.S. Factors?," IMF Working Papers 08/100, International Monetary Fund.
    16. John C Bluedorn & Rupa Duttagupta & Jaime Guajardo & Petia Topalova, 2013. "Capital Flows are Fickle; Anytime, Anywhere," IMF Working Papers 13/183, International Monetary Fund.
    17. 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.
    18. Carlos Rodríguez & Ricardo Bustillo, 2015. "Foreign Direct Investment and the Business Cycle: New Insights after the Great Recession," Prague Economic Papers, University of Economics, Prague, vol. 2015(2), pages 136-153.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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