During 1999-2007, the international balance sheets of emerging economies grew stronger through a combination of current account surpluses, a shift from debt funding to equity funding, and the stockpiling of liquid foreign reserves. This risk-mitigating strategy improved the international financial standing of many emerging economies and helped these economies withstand the 2008- 2009 global financial crisis.

However, a combination of domestic and external factors has led to a partial reversal of this strategy, with some emerging economies accumulating significant external debt since 2010. Previewed by the May 2013 “taper tantrum,” there has been considerable speculation that a tightening of dollar-funding conditions and a macroeconomic slowdown in emerging economies may result in financial instability in some emerging economies. 

The risk of a global shock to international funding conditions is extensively documented. In view of the central role of the dollar in international funding markets, global financial conditions are significantly influenced by the stance of U.S. monetary policy. In particular, it is now widely accepted that the federal funds rate plays an important role in determining the availability of dollar funding.

Program

About the Authors

Barry Eichengreen is a non-resident CIGI Senior Fellow. He is the George C. Pardee and Helen N. Pardee Professor of Economics and Professor of Political Science at the University of California, Berkeley, where he has taught since 1987. He is also a research associate of the National Bureau of Economic Research (Cambridge, Massachusetts). At CIGI, his research will focus on the internationalization of the renminbi.

Domenico Lombardi is director of the Global Economy Program and a member of the executive management committee at the Centre for International Governance Innovation (CIGI). He also serves on the advisory boards of the Peterson Institute for International Economics and the Bretton Woods Committee in Washington, and is a member of the Steering Committee of the Asian Economic Panel.

Malcolm D. Knight is a CIGI Distinguished Fellow. He is also deputy chair of the board of directors of the Canadian Payments Association, visiting professor of finance at the London School of Economics, a director of the Global Risk Institute in Financial Services and a member of the board of trustees of the International Valuation Standards Council.