ABSTRACT

Introduction1 Although several emerging market economies (EMEs) remained resilient to the onslaught of the Global Financial Crisis (GFC) of 2007 due to varied reasons, yet the underdevelopment of financial markets and related infrastructures (supervisory and regulatory frameworks particularly) in the majority of developing economies/EMEs poses a serious challenge to policy makers. Nonetheless, these challenges become manifold when unconventional policies pursued by the advanced economies in the post-GFC 2007 period are expected to be reversed in the months ahead.2 Several EMEs3 (e.g. Turkey, South Africa, India, Indonesia, Argentina, Russia and Chile) showed signs of financial instability and macroeconomic vulnerability in the form of interest rate and currency fluctuations and increased costs of borrowing, leading to alarming debt levels. Financial instability of these EMES has been further accentuated by slower global growth, falling commodity prices and current account weaknesses. With this background, the introduction of unconventional monetary policies (such as quantitative Easing [qE], see Annex A) by the uS Federal Reserve and its eventual exit from such policies have sparked a vigorous and ongoing debate among academics and policy makers about the spillover effects of these policies on EMEs.4 With this context, this chapter reviews the debate and assesses the evidence of spillovers from qE by focusing on the trends of capital flows to EMEs as being the main channel of impact. It is believed that qE and its anticipated reversal (known as taper talk) fostered risk taking and unusual capital movement to EMEs, contributing to excessively loose financial conditions and exchange rate fluctuations in these countries. It is worth mentioning that this is not the first time that the economic policies of advanced economies have unleashed the forces of instability in EMEs. Since the late 1970s, most of the EMEs have been victims of policies of advanced economies, and the increased financial globalization5 coupled with financial innovations and technological advancements over the last two decades have made these economies quite vulnerable even to the smallest shocks from advanced economies.