Search results

Emerging markets are said to have sustained relatively well in the recent global crisis. There are several factors that help explain this popular view, such as, for example, perceived separation from key international financial centres. Still a lot is to be digested in the crisis aftermath with immediate implications for financial markets and real economy. This chapter offers a unique insight into dynamics within transition economies via an extended blended fiscal–monetary policy rules model with possibility of foreign reserves targeting and foreign currency-denominated debt dynamics. Calibration is based on actual data and is done under various targets and financial risk conditions. Prudent monetary policy and fiscal policy initiatives within current context drive the choice of targets. That may help dampen negative impacts of the crisis and thwart potential currency run. This chapter advances three possible post-crisis scenarios, each with unique solution for reserves, exchange rate, sustainable debt and output levels. Categorizing between net exporters and net importers based on countries' external positions, group-specific results are derived. While both groups are susceptible to exchange-rate risk affected by a multitude of shocks due to their fragile financial system, net importers risk high inflation, but net exporters over-borrowing. This chapter contributes to the literature on global financial crisis, macroeconomic policy, and role of nominal targets and foreign reserves in emerging markets.

This chapter starts from the issue of debt in the context of a national economy by contrasting two opposed views: policy prescriptions based on the Washington Consensus prioritize low public debt and a limited role of the government in the development process whereas a more heterodox view considers debt as logical, necessary, and helpful in order to allow the government to pursue an ambitious growth and development strategy. However, things change when the economy is considered in its international context: foreign debt is different from domestic debt and while the same heterodox analysis still rejects the Washington Consensus' demand for trade and financial liberalization, its own ambitious development strategies for the domestic economy get constrained by trade deficits, the threat of capital flight, and exchange rate instability. The question arises how the government can still significantly contribute to economic development beyond the limits of a purely private sector–driven approach. This is why this chapter reviews proposals to relax or overcome the balance-of-payments constraint. Finally, it considers a reform of international payments, which can be implemented by a single country unilaterally, and which enables it to stabilize its current account, avoid foreign debt accumulation, and support domestic development strategies.

In this paper, we derive debt sustainability conditions for emerging and developing countries. Since most of these countries have foreign debt, that is, they have the so-called original sin problem, our calculations take into account both domestic and foreign debt. Our setup can be used to evaluate the short-term fiscal stance of a government. Using this setup, we analyze the post crisis fiscal adjustment in transition countries, namely Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. Our findings suggest that country performances are rather mixed and the pace of debt accumulation in some of these countries should be monitored closely.

Long-term interest rates of small open economies (SOE) correlate strongly with the USA long-term rate. Can central banks in those countries decouple from the United States? An estimated Dynamic Stochastic General Equilibrium (DSGE) model for the UK (vis-á-vis the USA) establishes three structural empirical results: (1) Comovement arises due to nominal fluctuations, not through real rates or term premia; (2) the cause of comovement is the central bank of the SOE accommodating foreign inflation trends, rather than systematically curbing them; and (3) SOE may find themselves much more affected by changes in USA inflation trends than the United States itself. All three results are shown to be intuitive and backed by off-model evidence.

Post-conflict economies are characterized by high, and often growing, levels of debt. At the same time, peace is particularly fragile in the aftermath of a conflict. This chapter studies how debt affects the risk of war in the 10 years that follow the end of a previous conflict. After controlling for per-capita income and other economic, political, and geographical factors, external debt is found to increase the risk of war. Conversely, the effect of domestic debt is negligible. The policy implication for the international community is clear: debt relief helps stabilize peace in war-torn economies.