Publications /
Policy Brief

Back
Download PDF
Quantitative Tightening and Capital Flows to Emerging Markets
Authors
Otaviano Canuto
June 24, 2022
Related topics: 
Economy
Macroeconomics and regulation

In its May 15th meeting, the Federal Open Market Committee of the U.S. Federal Reserve (Fed) lifted its benchmark policy rate by 0.75% to 1.50%–1.75%, the biggest increase since 1994. The central bank also signaled an additional increase of 0.75% ahead. FOMC members also raised the median projection for the Fed funds rate to a range between 3.25% and 3.50% next year.

In addition to hikes in basic interest rates, liquidity conditions in the US economy will also be affected by the shrinking of the Fed's balance sheet starting this month. The "quantitative easing" (QE) that resumed strongly in March 2020, in response to the financial shock at the beginning of the pandemic, will now give way to a "quantitative tightening".

How complementary - or substitute - will be those movements in interest rates and balance sheet downsizing? What are their likely consequences on capital flows to emerging markets?

RELATED CONTENT

  • Fed Monetary Policy, Inverted Yield Curve and Outlook for US and Global Economy
    Authors
    Satyandra Nayak
    Otaviano Canuto
    August 27, 2019
    Since the Fed’s July meeting, when the Fed Funds Rate had a 0.25% cut, fears about the impact of the US-China trade war on the global economy have escalated. The US yield curve inversion received much attention as a harbinger of a slowdown in the global and US economic outlooks. We approach here whether lights on next monetary policy events can be obtained from reading the minutes of the Fed’s meeting – and of the July meeting of the ECB governing council – released this week. The ...
  • Les instruments de Bretton Woods en mode de retrait contraint
    Authors
    Mohammed Germouni
    August 26, 2019
    La création d’instruments financiers à la Conférence de Bretton Woods, à la fin de la Seconde  Guerre mondiale, était une nouveauté pour l’époque et avait sonné la fin du chacun pour soi « monétaire », en jetant les bases d’un système de changes fixes mais ajustables reconnaissant, cependant, et dès le départ, la primauté du dollar de la nouvelle grande puissance. Le Fonds monétaire international (FMI) devant se charger de venir en aide aux pays à la balance des paiements déficitai ...
  • Download PDF
    Natural Wealth and Economic Growth: The Case of Sub-Saharan Africa
    Authors
    Otaviano Canuto
    Christos Daoulas
    August 22, 2019
    This note approaches the relationship between natural wealth and economic growth, using the case of Sub-Sahara African economies as an illustration. Delving into recent World Bank reports, it highlights how a sustained positive correlation between natural capital and GDP growth happens through the transformation of the former into other forms of assets: produced capital, human capital and other intangible assets. Governance features and the quality of macroeconomic policies are of t ...
  • Argentina’s Half-Baked Adjustment Has Not Worked
    Authors
    Otaviano Canuto
    August 19, 2019
    Argentina’s peso tumbled and stocks plunged after last Sunday’s primary elections. The perception of a likely victory of President Macri’s opponents – Alberto Fernandez, and running mate, Christina Fernandez de Kirchner - has sparked a new shift in investor preferences away from peso assets, pressures on the exchange rate, and hikes on sovereign spreads. Unless fears of a return to policies prevailing before Macri are assuaged, the market rout tends to deepen as a negative feedback ...
  • Brazil must hold to structural reforms while undergoing slow economic recovery
    Authors
    Otaviano Canuto
    August 8, 2019
    Brazil's economic recovery after the deep 2015-16 recession has been the slowest on record, with GDP per capita last year remaining more than 9% below its pre-crisis peak (Chart 1, right side). The IMF's annual report on the country's economy, released two weeks ago, estimated current GDP to be nearly 4% below its potential level, which suggests insufficiency of aggregate demand (Chart 1, left side). On the other hand, as the slow recovery reflects structural factors, it is necessar ...
  • Download PDF
    Vers une stratégie économique basée sur l’amélioration de la productivité
    Authors
    Elhadj EZZAHID
    July 19, 2019
    Les recherches sur les sources de croissance de long terme des économies montrent qu’elle dépend plus de la croissance de la productivité que de la croissance des volumes des inputs accumulés. Au Maroc, les résultats disponibles fournissent des évidences sur le rythme très lent de la croissance de la productivité mesurée par la PTF ou le rapport production-travail. Des simulations montrent que seule une augmentation de la PTF permettra d’atteindre une croissance suffisamment élevée. ...
  • Download PDF
    Middle Income Countries and Multilateral Development Banks Traps on the Way to Graduation
    Authors
    Otaviano Canuto
    Matheus Cavallari
    Tiago Ribeiro dos Santos
    July 19, 2019
    Multilateral Development Banks (MDBs) have two financing windows, with different terms, dedicated to low- and middle-income countries. Countries are presumed to cross those windows as their income per capita rises, with middle-income countries (MICs) eventually “graduating” to a non-client status once they reach some criteria. However, due to what may be called “middle-income traps”, such progression toward graduation has been limited to a small number of countries. ...
  • Download PDF
    The Entrepreneurial South African State: An analysis of current government action to stimulate innovation and recommendations for future policy and initiatives
    Authors
    Sandiso Sibisi
    July 17, 2019
    Despite considerable effort from the South African government to drive innovation, the investments to date have not reaped the fruits expected by both government and the private sector. I believe that if we are to realise ‘the new dawn’ in economic growth and transformation the state needs to reorganise itself to be an ‘entrepreneurial state’. This paper will proceed firstly by outlining current government action to support innovation, followed by a summary of the overarching recomm ...
  • Download PDF
    Les politiques macroéconomiques au Maroc et dans les pays en développement : quelques études empiriques
    Authors
    Comité scientifique :
    Abdelaaziz Ait Ali
    Ahmed Bousselhami
    Idriss El Abbassi
    Amine Marrat
    Lahcen Oulhaj
    Aziz Ragbi
    Said Tounsi
    June 13, 2019
    L’analyse des mutations qu’a connues l’économie marocaine après la crise économique et financière de 2008, offre l’opportunité d‘évaluer l’orientation des politiques macroéconomiques gérées dans un contexte relativement difficile, mettant à l’épreuve les décideurs publics en matière de politique économique et leur engagement à préserver la stabilité du cadre macroéconomique. Un diagnostic approfondi revient à apprécier la pertinence des choix de politiques macroéconomiques par rappo ...
  • Download PDF
    Current Account Adjustments and Exchange Rate Arrangements: What Regime for African Countries?
    Authors
    Abdelaaziz Ait Ali
    Mohamed Obaidy
    May 30, 2019
    This paper empirically examines the impact of exchange rate arrangements on current account imbalances within the African context. Following Friedman’s hypothesis (Friedman, 1953), we test the propositions stating that flexible exchange rate regimes limit the magnitude of real external shocks and permit smoother adjustments of external imbalances. Using a new de facto exchange rate regime classification, we employ two empirical methodologies to test this hypothesis: we first apply a ...