Emerging economies under pressure of the world economy : Can emerging economies respond to the tension?

Abstract

Emerging market economies have an increasingly closer relation to the global economy. Even small changes in the global economy may trigger significant fluctuations in emerging economies. Such changes may be large enough to become the seed of financial crisis. Changes in the global economy affect via capital flows and foreign exchange rate. To manage such market forces, the policymakers in such countries have used different forms of capital controls or foreign exchange intervention as the macroprudential instruments. This work investigates examples of such interventions and why such methods may work and what are the relevant constraints. Global factors are driving factors behind the international investors who make the capital flows partly sensitive to global factors. Secondly, due to a lack of hedge opportunities or a lack of willingness to use such opportunities leads to the existence of currency risk. Combining the currency risk on collateral and collateral dependent borrowing constraint opens the possibility of a combination of tightening collateral constraint due to falling collateral value if the exchange rate goes the wrong direction. If that risk accrues, it quickly leads to a severe financial crisis. This work reviews of the models from articles of Benigno et al. (2016) and Steiner (2017), to understand some potential instruments for intervention, also how such instruments may be useful tools. According to the argumentation of this work, something can do with capital controls or foreign exchange interventions in certain circumstances. It is also possible that the existence of potentially efficient instruments creates the safety net which promotes stability by mere existence. However, it is also possible that the existence of the safety net operates another way than intended.