advanced economies divergences, emerging markets convergence? nicolas … · 2016-06-02 ·...
TRANSCRIPT
Advanced Economies
Divergences,
Emerging Markets
Convergence?
Nicolas E. Magud International Monetary Fund
Jornadas Económicas 2016
Guatemala
The views expressed in this presentation are those of the presenter and do not necessarily represent the views of the
IMF, its Executive Board, or IMF management.
Overview
• World growth: AEs vs. EMs; differences among AEs
– US
– EU
– Japan
• Highlight: AEs’ real exchange rate and inflation divergence
• Tighter US monetary policy
– Capital flows, commodity prices’ retrench
– EMs investment slowdown (commodity prices & monetary shocks)
• Policy
– Exchange rate flexibility smoothes real effects of capital flows cycles
– Capital controls not much effective
2015 3.1 1.9 2.4 0.5 1.6 4.0 6.9 7.3 -3.8 -3.7
2016 3.2 1.9 2.4 0.5 1.5 4.1 6.5 7.5 -3.8 -1.8
Revision
from Jan.
2016
-0.2 -0.2 -0.2 -0.5 -0.2 -0.2 0.2 0.0 -0.3 -0.8
2017 3.5 2.0 2.5 -0.1 1.6 4.6 6.2 7.5 0.0 0.8
Revision
from Jan.
2016
-0.1 -0.1 -0.1 -0.4 -0.1 -0.1 0.2 0.0 0.0 -0.2
Sources: IMF, World Economic Outlook January 2016 Update; and IMF, World Economic Outlook April 2016.
Global growth remains moderate and uneven (Growth projections, percent change from a year earlier)
2
3
Growth convergence (down)
Real GDP Growth
(Year-over-year percentage change)
Source: IMF, World Economic Outlook database.
-4
-2
0
2
4
6
8
2008 2009 2010 2011 2012 2013 2014 2015 2016
Advanced Economies Emerging Market and Developing Economies
-2
0
2
4
6
8
-3
-2
-1
0
1
2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4
Oil investment Government consumption and investment Net exports
Real GDP growth
(percent, right scale)
Private sales growth
(percent, right scale)
United States: Contribution to Growth
(Percentage points)
Sources: Bureau of Economic Analysis; and IMF staff calculations. 4
Consumption-driven U.S. growth…
Sources: Bloomberg, L.P.; Federal Reserve; and IMF staff estimates.
4.5
5.5
6.5
7.5
8.5
0
100
200
300
400
2013 2014 2015 2016
Change in nonfarm
payrolls
(thousands) Average 2004–06
United States: Payrolls and Unemployment Rate
5
United States: Unemployment Rate Projections
(Percent, seasonally adjusted)
4
5
6
7
8
2012Q4 2013Q2 2013Q4 2014Q2 2014Q4 2015Q2 2015Q4
Sources: BLS; Haver Analytics; and IMF staff estimates.
… on the back strengthening labor market…
Actual
Spring 2015 WEO
Spring 2014 WEO
Spring 2013 WEO
Unemployment rate
(percent; right scale)
Sources: Haver Analytics; IMF staff calculations.
United States: Housing Activity
(Seasonally adjusted, million units)
6
United States: Household Formation
(12-month moving average, thousands)
Sources: Haver Analytics; and IMF staff calculations.
4.5
4.8
5.1
5.4
5.7
0.8
0.9
1.0
1.1
1.2
1.3
Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
Total existing home
sales (right scale)
Housing starts
-40
0
40
80
120
160
200
1995 2000 2005 2010 2015
Pre-crisis average
… and increasing wealth…
Source: IMF staff estimates.
United States: Consumption and Saving Rate
(Percent)
7
United States: Consumer Credit
(Percent)
Sources: Federal Reserve Board; New York Times; Wall Street Journal; and Haver Analytics.
4.6
4.7
4.8
4.9
5
5.1
5.2
5.3
1.0
1.5
2.0
2.5
3.0
3.5
2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3
Consumption
growth
(year-over-year)
Saving rate (right scale)
& 2013-2014 avg.
Projections Oil shock
-6
-4
-2
0
2
4
6
8
2
3
4
5
6
7
2010 2011 2012 2013 2014 2015 2016
Home mortgage rate
(30-year fixed)
New car loan rate
(48 months)
Consumer credit growth
(year-over-year, right scale)
… which, along with the recovery in credit growth, helped
boosting consumption and saving
Sources: Haver Analytics; IMF, Global Assumptions database; and IMF staff estimates.
United States: Oil Investment and Price
8
United States: Nonresidential Investment
(Percent of GDP)
Sources: Haver Analytics; and IMF staff estimates.
25
45
65
85
105
45
70
95
120
145
170
195
2014Q1 2014Q4 2015Q3 2016Q2 2017Q1 2017Q4
WTI (US$ per
barrel, right scale)
Oil Investment
(2009$)
Projections
0
2
4
6
8
10
12
14
16
1990 1995 2000 2005 2010 2015
Non-oil Oil Proj.
Investment is adjusting to lower oil prices but rebounding
Sources: Haver Analytics; IMF staff calculations.
United States: Manufacturing
(Seasonally adjusted)
9
United States: Net Exports
Sources: Haver Analytics; and IMF staff estimates.
45
50
55
60
65
70
-10
-5
0
5
10
15
Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16
ISM new orders index
(50+ = increasing, right scale)
Non-energy IP
(percent, year-over-year)
80
85
90
95
100
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
2012 2013 2014 2015 2016 2017
Net exports
(%pts, cont. to growth)
Projections
A stronger U.S. dollar compressing net exports, with
sector differentiation
REER
(1973Q1=100,
right scale)
REER
(percent, year-over-year)
Sources: Haver Analytics; IMF staff calculations.
United States: Wage Growth
(Percent, year-over-year)
10
United States: Output Gap and Labor Market Quit Rate
Sources: Haver Analytics; and IMF staff estimates.
0
1
2
3
4
5
2005 2007 2009 2011 2013 2015
Employment
cost index
Average hourly
earnings
3
4
5
6
7
-6
-4
-2
0
2
4
2005Q1 2008Q1 2011Q1 2014Q1 2017Q1 2020Q1
Projections
Labor market
quit rate
(percent, right scale)
Output gap
(percent of potential)
Output recovery starting to impact wage growth and
closing the output gap
Source: Haver Analytics.
United States: Core Inflation
(Percent; year-over-year)
11
0.5
1.0
1.5
2.0
2.5
2010 2011 2012 2013 2014 2015 2016
Core PCE
Core CPI
… with some rebound in inflation, though still to come
Euro Area: slow growth, weakening confidence…
Consumer and Business Confidence
Contributions to Growth
(Percentage point)
-1.0
-0.5
0.0
0.5
1.0
2012Q
1
2012Q
3
2013Q
1
2013Q
3
2014Q
1
2014Q
3
2015Q
1
2015Q
3
Net exports
Domestic demand
GDP 60
70
80
90
100
110
120
-40
-35
-30
-25
-20
-15
-10
-5
0
Jan
-12
Jun
-12
No
v-1
2
Ap
r-13
Sep
-13
Feb
-14
Jul-
14
Dec-
14
May-1
5
Oct
-15
Mar-
16
Household confidence (balance of
opinions)
Business confidence (ESI,
long-term average=100, rhs)
50
60
70
80
90
100
110
120
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
Dec-
15
Jan
-16
Feb
-16
Mar-
16
Ap
r-16
Eurostoxx
S&P500
Eurostoxx banks
Stock Market
(7/1/2015 = 100)
Sources: Haver Analytics and Eurostat.
Sources: Haver Analytics and Eurostat.
Sources: Haver Analytics and Eurostat.
12
… lower inflation and inflation expectations
-1
0
1
2
3
4
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Mar-
16
Headline
Core
2y2y inflation expectation
Europe: Various Inflation Measures
(Percent, y-o-y)
Sources: Bloomberg, L.P.; and Haver Analytics.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Apr-13 Apr-14 Apr-15 Apr-16
5y5y 2y2y
1y1y
Jackson Hole Speech
QE Announcement
QE Implementation
Europe: Inflation-Linked Swap Rates
(Percent)
Sources: Bloomberg, L.P.; and Haver Analytics.
13
14
Japan: modest growth, some investment rebound, soft
exports…
Japan: Private Investment
(Percent; quarter-over-quarter)
Source: Haver Analytics.
Japan: Contributions to Growth
(Percent; quarter-over-quarter)
Sources: Haver Analytics; and IMF staff estimates. Source: CPB World Trade Monitor.
World Exports
(Index: January 2013 = 100;
seasonally adjusted; volume)
-1
0
1
2
3
2012 2013 2014 2015 2016 2017 2018 2019
Net exports
Government spending
Private inventories
Private gross fixed investment
Private consumption
GDP growth
-25
-20
-15
-10
-5
0
5
10
15
20
2010Q
1
2011Q
1
2012Q
1
2013Q
1
2014Q
1
2015Q
1
Dwellings
Plant and Equipment
2015Q
4 95
100
105
110
115
Feb
-13
Jun
-13
Oct
-13
Feb
-14
Jun
-14
Oct
-14
Feb
-15
Jun
-15
Oct
-15
Feb
-16
United States Japan
Euro Area Emerging economies
15
… hovering deflation, as the Yen appreciates while
exports/imports prices continue nosing down…
Source: Haver Analytics.
Japan: Inflation Indicators
(Percent; year-over-year)
Japan: Export and Import Price Indices
(Percent; year-over-year)
Source: Haver Analytics.
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Jan
-10
Feb
-11
Mar-
12
Ap
r-13
May-1
4
Jun
-15
Headline w/o VAT
Core (ex. fresh food) w/o VAT
Core (ex. fresh food and energy) w/o VAT
Ap
r-16 -25
-20
-15
-10
-5
0
5
10
15
20
25
Ap
r-10
Ap
r-11
Ap
r-12
Ap
r-13
Ap
r-14
Ap
r-15
Ap
r-16
Import Price Index
Export Price Index
Japan: Selected Exchange Rates
(Index: 2005 = 100)
Source: Bloomberg, L.P.
70
75
80
85
90
95
100
105
110
115
120
May-1
4
Au
g-1
4
No
v-1
4
Feb
-15
May-1
5
Au
g-1
5
No
v-1
5
Feb
-16
May-1
6
Yen/US$ Yen/Euro
Yen/KWN NEER
16
… weak market expectations and lack of credit impulse…
Japan: Senior Loan Officer Survey Opinion
Survey-Spreads of Loan Rates
(Diffusion index for the past three months; +
values correspond to increase spreads)
Sources: Bank of Japan, Senior Loan Officer Opinion Survey.
Japan: JGB Yield Curve and Range
(Percentage points)
Source: Bloomberg, L.P.
Note: Range indicates maximum and minimum yields per maturity
per indicated period.
Source: Haver Analytics.
Japan: Excess Reserves
(Percent of GDP)
0
10
20
30
40
50
2010Q
1
2011Q
1
2012Q
1
2013Q
1
2014Q
1
2015Q
1
2016Q
1
-40
-20
0
20
40
60
80
2001Q1 2004Q1 2007Q1 2010Q1 2013Q1 2016Q1
Spreads-High ratings
Spreads-Medium Ratings
Spreads-Low Ratings
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3M
6M
1Y
2Y
3Y
4Y
5Y
6Y
7Y
8Y
9Y
10Y
15Y
20Y
30Y
40Y
5/12/2016
Hi-Lo Range 1Y-to-date
Hi-Lo Range since CME (Oct 2010)
Before Abenomics - Sep 2012
Inflation
target
17
… continue to decrease inflation expectations
Source: Haver Analytics.
Japan: Tankan Survey: Inflation Outlook Japan: Inflation Expectations
(Percentage points; year-over-year)
Sources: Bloomberg, L.P.; and IMF staff estimates.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Jan-13 Sep-13 May-14 Jan-15 Sep-15
Inflation-Swaps 5Y
Inflation-Swaps 10Y
Break-even rate 10Y JGBs
Apr-16
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1
1 Year ahead
3 Year ahead
5 Year ahead
18
Inflation divergence, …
Source: Haver Analytics.
Observed Inflation
(Year-over-year percentage change)
-4
-3
-2
-1
0
1
2
3
4
5
6
2008
2009
2010
2011
2012
2013
2014
2015
2016
United States Euro Area Japan
-0.5
0.0
0.5
1.0
1.5
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
Dec-
15
Jan
-16
Feb
-16
Mar-
16
Ap
r-16
United States Euro Area Japan
19
…inflation expectations differences…
Source: Consensus Forecasts.
Expected Inflation
(Year-over-year percentage change, 1-year ahead)
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
2008
2009
2010
2011
2012
2013
2014
2015
2016
United States Euro Area Japan
0.5
1.0
1.5
2.0
2.5
3.0
Jul-
15
Au
g-1
5
Sep
-15
Oct
-15
No
v-1
5
Dec-
15
Jan
-16
Feb
-16
Mar-
16
Ap
r-16
United States Euro Area Japan
20
… and exchange rate divergence…
Real Exchange Rate Divergence
(Index: 2010 = 100)
Source: IMF, Information Notice System database.
60
70
80
90
100
110
120
2008Q
1
2008Q
2
2008Q
3
2008Q
4
2009Q
1
2009Q
2
2009Q
3
2009Q
4
2010Q
1
2010Q
2
2010Q
3
2010Q
4
2011Q
1
2011Q
2
2011Q
3
2011Q
4
2012Q
1
2012Q
2
2012Q
3
2012Q
4
2013Q
1
2013Q
2
2013Q
3
2013Q
4
2014Q
1
2014Q
2
2014Q
3
2014Q
4
2015Q
1
2015Q
2
2015Q
3
2015Q
4
2016Q
1
United States Euro Area Japan
30%
15%
21
… is reversing capital inflows to emerging markets
Source: IMF, Balance of Payments Statistics database.
Emerging and Developing Economies: Net Capital Inflows
(Billions of U.S. dollars)
Emerging and Developing Economies: Gross Capital Inflows
(Billions of U.S. dollars)
Source: IMF, Balance of Payments Statistics database.
-200
-150
-100
-50
0
50
100
150
200
250
300
2008Q
1
2008Q
3
2009Q
1
2009Q
3
2010Q
1
2010Q
3
2011Q
1
2011Q
3
2012Q
1
2012Q
3
2013Q
1
2013Q
3
2014Q
1
2014Q
3
2015Q
1
2015Q
3
Total Direct investment Portfolio investment Other investment
-200
-100
0
100
200
300
400
500
600
2008Q
1
2008Q
3
2009Q
1
2009Q
3
2010Q
1
2010Q
3
2011Q
1
2011Q
3
2012Q
1
2012Q
3
2013Q
1
2013Q
3
2014Q
1
2014Q
3
2015Q
1
2015Q
3
Total Direct investment Portfolio investment Other investment
22
Commodity prices mirror the US dollar…
Sources: Bloomberg, L.P.; and IMF, Information Notice System database.
United States Real Effective Exchange Rate versus Overall CRB Index
(Index: 2010 = 100)
40
50
60
70
80
90
100
110
120
130
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
USA REER CRB Overall
60
70
80
90
100
110
120
130
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
USA REER CRB Overall
In a nutshell
• Weak global growth and inflation, especially in AEs
• However, among AEs, US
– Stronger growth
– Closing output gap
• Would it close faster if potential is lower than estimated?
– Indication of labor market stabilization
– Stronger US dollar
– Thus, is it growth, or expected inflation differentials that matter?
– Divergent implications for monetary policy…
– Plus, US dollar “global” unit of account, medium of exchange, and
store of value: weaker commodity prices
• Softer EM growth (Druck, Magud, & Mariscal 2015) 23
Historical perspective: proxy decade-dollar cycles
-4
-2
0
2
4
6
8
10
90
100
110
120
130
140
150
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Depreciation Appreciation USA Real interest rate (right scale) U.S. real
appreciation
Gr_SLAC (right scale)
Oil shocks
Volcker disinflation Greenspan's put
Plaza
accord Clinton years' expansion Commodity super-cycle
24
Druck, Magud, & Mariscal (2015)
• Do dollar cycles affect EM growth? (REER vs. ToT)
– Yes! (historical evidence)
• Through which channels?
– Income effect offsets expenditure-switching eff.
• Highly persistent dollar cycles result in:
– Net commodity exporters: stronger USD, lower USD commodity prices, income effect reduces domestic demand growth, slows real GDP growth—despite any expansionary effect owing to domestic currency depreciation
– Importers of capital/inputs in production: stronger USD, weaker currencies (relative price), higher import costs, slower production and domestic demand growth
25
Side effects (especially going forward)
• US interest rates at zero-lower bound – Tighter financial conditions going forward, slower growth, especially
in highly dollar-leveraged countries
• Effects amplify for less flexible exchange rate regimes
• Prospects: – Dollar cycle is persistent and it is just starting
– Weak commodity prices projected
– US interest rate lift-off
26
Identifying U.S. dollar cycles
Markov-switching model:
Mu I (2009)
Regime 1 Δ REER Coeff. 3.17 9.48 3.54
(Appreciation) t-stat 3.07 2.55 7.89
p-value 0.00 0.02 0.00
Regime 2 Δ REER Coeff. -3.76 9.48 3.54
(Depreciation) t-stat -4.06 2.55 7.89
p-value 0.00 0.02 0.00
Descriptive statistics for scaled residuals:
Normality test: Chi^2(2) = 5.5771 [0.0615]
ARCH 1-1 test: F(1,37) = 0.41741 [0.5222]
Portmanteau( 6): Chi^2(6) = 10.635 [0.1003]
Regime 1 years avg.prob.
1979 - 1985 7 0.909
1993 - 2001 9 0.896
2012 - 2014 3 0.897
Total: 19 years (42.22%) with average duration of 6.33 years.
Regime 2 years avg.prob.
1970 - 1978 9 0.961
1986 - 1992 7 0.912
2002 - 2011 10 0.936
Total: 26 years (57.78%) with average duration of 8.67 years.
Transition probabilities
Regime 1, (t) Regime 2, (t)
Regime 1, (t+1) 0.833 0.124
Regime 2, (t+1) 0.167 0.876
Left-hand varible
Right-hand variable
SigmaMu I (2009)
Regime 1 Δ REER Coeff. 3.43 9.49 3.60
(Appreciation) t-stat 2.98 2.55 8.24
p-value 0.01 0.02 0.00
Regime 2 Δ REER Coeff. -3.74 9.49 3.60
(Depreciation) t-stat -4.34 2.55 8.24
p-value 0.00 0.02 0.00
Descriptive statistics for scaled residuals:
Normality test: Chi^2(2) = 4.3971 [0.1110]
ARCH 1-1 test: F(1,34) = 0.22521 [0.6381]
Portmanteau( 6): Chi^2(6) = 10.302 [0.1125]
Regime 1 years avg.prob.
1979 - 1985 7 0.898
1993 - 2001 9 0.875
Total: 16 years (38.10%) with average duration of 8.00 years.
Regime 2 years avg.prob.
1970 - 1978 9 0.977
1986 - 1992 7 0.940
2002 - 2011 10 0.953
Total: 26 years (61.90%) with average duration of 8.67 years.
Transition probabilities
Regime 1, (t) Regime 2, (t)
Regime 1, (t+1) 0.827 0.173
Regime 2, (t+1) 0.083 0.917
Left-hand varible
Right-hand variable
Sigma
21
22
2009
2009
Regime 1: , ~ (0, )
Regime 2: , ~ (0, )
t t t
t t t
reer N
reer I N
I
Including current episode Excluding current episode
27
U.S. dollar cycles
• Appreciation and depreciation cycles
Depreciation Cycles Appreciation Cycles
1970–1978 1979–1985
1986–1992 1996–2001
2002–2011 2012–2014
D REER
Fitted
1-step prediction
Appreciation
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
-12
-8
-4
0
4
8
12D REER
Fitted
1-step prediction
Appreciation
1970 1975 1980 1985 1990 1995 2000 2005 2010 20150.00
0.25
0.50
0.75
1.00P[Depreciation] smoothed
1970 1975 1980 1985 1990 1995 2000 2005 2010 20150.00
0.25
0.50
0.75
1.00P[Appreciation] smoothed
28
Stylized facts: Stronger dollar, lower EMs growth and domestic demand
90
110
130
150 -2
0
2
4
6
8
10
1970 1981 1992 2003 2014
LAC (3-year moving average, percent change)
U.S. REER (index: 2010=100; right scale)
Sources: IMF, World Economic Outlook; and IMF, International Financial Statistics; and IMF staff calculations.
Note: REER = Real Effective Exchange Rate. Increase = depreciation.
South America's Growth
90
110
130
150 -2
0
2
4
6
8
10
1970 1981 1992 2003 2014
South America (3-year moving average, percent
change)
Emerging Asia's Growth
90
110
130
150 0
5
10
1970 1981 1992 2003 2014
Emerging Asia (3-year moving average, percent
change)
Middle East and North Africa's Growth
Central America and Mexico's Growth
90
110
130
150 -5
0
5
10
1970 1981 1992 2003 2014
Central America + Mexico (3-year moving average,
percent change)
Emerging Europe's Growth
90
110
130
150 -2
3
8
1970 1981 1992 2003 2014
Emerging Europe (3-year moving average, percent
change)
Latin America and Caribbean's Growth
Dollar Strength and Economic Growth
90
110
130
150 -2
0
2
4
6
8
10
1970 1981 1992 2003 2014
MENA (3-year moving average, percent change)
U.S. REER (index: 2010=100; right scale)
29
South America's Growth
90
110
130
150 -15
-5
5
15
25
1970 1981 1992 2003 2014
South America (3-year moving average, percent change)
U.S. REER (index: 2010=100; right scale)
Emerging Asia's Growth
90
110
130
150 -10
0
10
20
1970 1981 1992 2003 2014
Emerging Asia (3-year moving average, percent change)
U.S. REER (index: 2010=100; right scale)
Middle East and North Africa's Growth
Central America and Mexico's Growth
90
110
130
150 -15
-5
5
15
25
1970 1981 1992 2003 2014
Central America + Mexico (3-year moving average, percent
change)
Emerging Europe's Growth
90
110
130
150 -15
-5
5
15
25
1970 1981 1992 2003 2014
Emerging Europe (3-year moving average, percent change)
U.S. REER (index: 2010=100; right scale)
Latin America and Caribbean's Growth
90
110
130
150 -10
0
10
20
1970 1981 1992 2003 2014
LAC (3-year moving average, percent change)
U.S. REER (index: 2010=100; right scale)
Dollar Strength and Domestic Demand
90
110
130
150 -60
-40
-20
0
20
40
1970 1981 1992 2003 2014
MENA (3-year moving average, percent change)
U.S. REER (index: 2010=100; right scale)
Sources: IMF, World Economic Outlook; and IMF, International Financial
Statistics; and IMF staff calculations.
Note: REER = Real Effective Exchange Rate. Increase = depreciation.
Stylized fact: Higher US interest rates, stronger dollar & US growth
U.S. Dollar Strength and Real Interest Rate
(Percent)
90
100
110
120
130
140
150 -4
-2
0
2
4
6
8
10
1970 1981 1992 2003 2014
U.S. Real interest rate
U.S. REER (index: …
Sources: IMF, World Economic Outlook database; and IMF, International Financial
Statistics database; and IMF staff calculations.
Note: REER = Real Effective Exchange Rate. Increase = depreciation.
30
U.S. Real GDP growth and Real Interest Rate
(Percent)
-4
-2
0
2
4
6
8
10
1970 1981 1992 2003 2014
U.S. Real
interest rate
Sources: IMF, World Economic Outlook; and IMF, International
Financial Statistics; and IMF staff calculations.
Note: REER = Real Effective Exchange Rate. Increase =
depreciation.
Event analysis: dollar appreciation cycles, weaker EM and dom dem growth
Source: authors' calculation.
90
100
110
120
130
140
150
t0 t1 t2 t3 t4
depreciation
appreciation
LAC: Average Real GDP
(Index, t-1 = 100)
90
100
110
120
130
140
150
t0 t1 t2 t3 t4
depreciation
appreciation
SLAC: Average Real GDP
(Index, t-1 = 100)
90
100
110
120
130
140
150
t0 t1 t2 t3 t4
depreciation
appreciation
CAM: Average Real GDP
(Index, t-1 = 100)
100
110
120
130
140
150
160
170
180
190
t0 t1 t2 t3 t4
depreciation
appreciation
Asia: Average Real GDP
(Index, t-1 = 100)
90
100
110
120
130
140
150
160
170
180
t0 t1 t2 t3 t4
depreciation
appreciation
MENA: Average Real GDP
(Index, t-1 = 100)
90
100
110
120
130
140
150
t0 t1 t2 t3 t4
depreciation
appreciation
Euro: Average Real GDP
(Index, t-1 = 100)
31
90
110
130
150
170
190
210
230
t0 t1 t2 t3 t4
depreciation
appreciation
LAC: Average Domestic Demand
(Index, t-1 = 100)
90
110
130
150
170
190
210
230
250
270
t0 t1 t2 t3 t4
depreciation
appreciation
SLAC: Average Domesitic Demand
(Index, t-1 = 100)
80
90
100
110
120
130
140
150
160
t0 t1 t2 t3 t4
depreciation
appreciation
CAM: Average Domestic Demand
(Index, t-1 = 100)
100
110
120
130
140
150
160
170
180
190
200
t0 t1 t2 t3 t4
depreciation
appreciation
Asia: Average Domestic Demand
(Index, t-1 = 100)
80
130
180
230
280
330
t0 t1 t2 t3 t4
depreciation
appreciation
MENA: Average Domestic Demand
(Index, t-1 = 100)
70
90
110
130
150
170
190
210
t0 t1 t2 t3 t4
depreciation
appreciation
Euro: Average Domestic Demand
(Index, t-1 = 100)
Source: authors' calculations.
Results: real GDP growth—Latin America
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.206*** -0.202*** -0.213*** -0.210*** -0.207*** -0.209***
(0.025) (0.025) (0.026) (0.026) (0.026) (0.026)
U.S. real interest rate (t-1) -0.270*** -0.314*** -0.320*** -0.415*** -0.424*** -0.430***
(0.087) (0.091) (0.096) (0.114) (0.116) (0.116)
U.S. real GDP growth (t-1) 0.154** 0.218*** 0.222*** 0.221*** 0.199***
(0.064) (0.059) (0.059) (0.061) (0.061)
Ln real GDP per capita (t-1) -0.082 -0.060 -0.057 -0.073
(0.072) (0.069) (0.070) (0.073)
China real GDP growth 0.147** 0.155*** 0.153***
(0.054) (0.052) (0.052)
Net capital inflows -0.025 -0.028
(0.026) (0.027)
Volatility, S&P -0.169***
(0.049)
Constant 3.963*** 3.641*** 4.434*** 3.086*** 3.104*** 5.091***
(0.224) (0.250) (0.840) (0.820) (0.829) (1.180)
Observations 946 946 865 865 858 858
Adjusted R2 0.0699 0.0739 0.0890 0.0979 0.0978 0.1056
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel LAC: real GDP growth rate (in percent)
32
Results: real GDP growth—South America
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.247*** -0.243*** -0.254*** -0.249*** -0.245*** -0.248***
(0.028) (0.027) (0.029) (0.029) (0.031) (0.031)
U.S. real interest rate (t-1) -0.417*** -0.468*** -0.461*** -0.617*** -0.616*** -0.621***
(0.098) (0.101) (0.094) (0.103) (0.103) (0.102)
U.S. real GDP growth (t-1) 0.182* 0.240** 0.246** 0.250** 0.230**
(0.096) (0.085) (0.085) (0.086) (0.088)
Ln real GDP per capita (t-1) -0.101 -0.067 -0.065 -0.079
(0.080) (0.075) (0.076) (0.081)
China real GDP growth 0.246*** 0.241*** 0.237***
(0.070) (0.067) (0.067)
Net capital inflows -0.027 -0.035
(0.051) (0.052)
Volatility, S&P -0.179**
(0.079)
Constant 4.195*** 3.814*** 4.899*** 2.634** 2.743** 4.872**
(0.247) (0.331) (1.078) (1.099) (1.097) (1.739)
Observations 516 516 489 489 489 489
Adjusted R2 0.1027 0.1071 0.1177 0.1395 0.1389 0.1452
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel SLAC: real GDP growth rate (in percent)
33
Results: real GDP growth—Central America and Mexico
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.131** -0.127** -0.127** -0.125** -0.119** -0.121**
(0.044) (0.043) (0.043) (0.044) (0.041) (0.042)
U.S. real interest rate (t-1) -0.249* -0.296** -0.337** -0.401** -0.423** -0.427**
(0.109) (0.114) (0.118) (0.131) (0.141) (0.140)
U.S. real GDP growth (t-1) 0.165+ 0.249** 0.252** 0.247** 0.220**
(0.100) (0.083) (0.082) (0.082) (0.078)
Ln real GDP per capita (t-1) 0.216+ 0.267* 0.243 0.188
(0.132) (0.130) (0.151) (0.165)
China real GDP growth 0.100+ 0.129** 0.125*
(0.059) (0.051) (0.053)
Net capital inflows -0.019 -0.020+
(0.013) (0.011)
Volatility, S&P -0.176**
(0.052)
Constant 4.173*** 3.829*** 2.033* 0.823 0.873 3.271*
(0.299) (0.364) (1.065) (1.221) (1.185) (1.491)
Observations 344 344 290 290 283 283
Adjusted R2 0.0411 0.0455 0.0823 0.0859 0.0780 0.0903
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel CAM: real GDP growth rate (in percent)
34
Results: real GDP growth—Developing Asia
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.058 -0.059 -0.061 -0.061 -0.087+ -0.088+
(0.047) (0.048) (0.052) (0.052) (0.053) (0.053)
U.S. real interest rate (t-1) 0.042 0.054 0.015 -0.027 -0.099 -0.101
(0.093) (0.090) (0.097) (0.093) (0.096) (0.096)
U.S. real GDP growth (t-1) -0.041 -0.035 -0.031 -0.033 -0.046
(0.064) (0.066) (0.065) (0.062) (0.065)
Ln real GDP per capita (t-1) -0.435** -0.416** -0.315** -0.331**
(0.166) (0.166) (0.128) (0.129)
China real GDP growth 0.064 0.074 0.073
(0.064) (0.063) (0.063)
Net capital inflows 0.079*** 0.079***
(0.017) (0.017)
Volatility, S&P -0.083
(0.074)
Constant 4.628*** 4.714*** 8.313*** 7.664*** 6.818*** 7.848***
(0.217) (0.284) (1.362) (1.518) (1.258) (1.495)
Observations 812 812 755 755 629 629
Adjusted R2 0.0028 0.0019 0.0209 0.0213 0.0588 0.0599
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel DevAsia:real GDP growth rate (in percent)
35
Results: real GDP growth—Developing Europe
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.167** -0.161** -0.169** -0.170** -0.145** -0.146**
(0.058) (0.059) (0.055) (0.055) (0.052) (0.053)
U.S. real interest rate (t-1) -0.222+ -0.300* -0.301* -0.274* -0.176 -0.173
(0.127) (0.151) (0.145) (0.138) (0.112) (0.117)
U.S. real GDP growth (t-1) 0.280* 0.297* 0.297* 0.342* 0.339*
(0.124) (0.128) (0.128) (0.143) (0.153)
Ln real GDP per capita (t-1) -0.122 -0.135 -0.190 -0.193
(0.111) (0.108) (0.147) (0.137)
China real GDP growth -0.040 -0.010 -0.013
(0.037) (0.061) (0.063)
Net capital inflows 0.040* 0.043+
(0.018) (0.023)
Volatility, S&P -0.024
(0.107)
Constant 3.301*** 2.719*** 4.020** 4.460*** 4.078** 4.370***
(0.309) (0.242) (1.087) (1.021) (1.288) (1.079)
Observations 271 271 271 271 255 255
Adjusted R2 0.0287 0.0381 0.0392 0.0361 0.0304 0.0265
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel DevEuro: real GDP growth rate (in percent)
36
Results: real GDP growth—Middle East & Northern Africa
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.002 -0.002 -0.015 -0.015 0.033 0.030
(0.074) (0.074) (0.072) (0.071) (0.067) (0.066)
U.S. real interest rate (t-1) -0.222 -0.226 -0.262 -0.221 -0.302* -0.307*
(0.256) (0.262) (0.260) (0.186) (0.170) (0.172)
U.S. real GDP growth (t-1) 0.016 0.064 0.061 0.125 0.105
(0.184) (0.193) (0.193) (0.189) (0.191)
Ln real GDP per capita (t-1) -0.826** -0.852** -0.706+ -0.747+
(0.292) (0.360) (0.463) (0.482)
China real GDP growth -0.062 -0.102 -0.100
(0.270) (0.261) (0.260)
Net capital inflows 0.183*** 0.182***
(0.018) (0.018)
Volatility, S&P -0.159
(0.118)
Constant 5.148*** 5.115*** 12.917*** 13.626** 12.841* 14.902*
(0.644) (0.751) (3.116) (5.518) (6.604) (7.672)
Observations 645 645 645 645 633 633
Adjusted R2 -0.0006 -0.0021 0.0067 0.0054 0.1152 0.1149
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel MENA: real GDP growth rate (in percent)
37
Results: real domestic demand growth—Latin America
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.587*** -0.577*** -0.617*** -0.607*** -0.598*** -0.596***
(0.132) (0.131) (0.146) (0.146) (0.145) (0.146)
U.S. real interest rate (t-1) -0.773*** -0.899*** -1.125*** -1.463*** -1.503*** -1.500***
(0.214) (0.235) (0.221) (0.265) (0.262) (0.261)
U.S. real GDP growth (t-1) 0.445* 0.639*** 0.658*** 0.663*** 0.674***
(0.227) (0.216) (0.216) (0.220) (0.221)
Ln real GDP per capita (t-1) -0.242** -0.162* -0.154* -0.147*
(0.094) (0.082) (0.084) (0.083)
China real GDP growth 0.531*** 0.508*** 0.509***
(0.143) (0.143) (0.144)
Net capital inflows -0.164*** -0.163***
(0.057) (0.057)
Volatility, S&P 0.085
(0.165)
Constant 7.304*** 6.374*** 8.574*** 3.683** 4.554** 3.556
(0.544) (0.662) (1.517) (1.702) (1.728) (2.718)
Observations 939 939 858 858 858 858
Adjusted R2 0.0245 0.0254 0.0599 0.0684 0.0722 0.0712
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel LAC: real domestic demand growth rate (in percent)
38
Results: real domestic demand growth—South America
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.813*** -0.798*** -0.875*** -0.861*** -0.837*** -0.837***
(0.212) (0.211) (0.219) (0.220) (0.222) (0.224)
U.S. real interest rate (t-1) -1.254*** -1.427*** -1.528*** -1.964*** -1.953*** -1.952***
(0.274) (0.279) (0.304) (0.365) (0.374) (0.370)
U.S. real GDP growth (t-1) 0.611* 0.720** 0.736** 0.759** 0.761**
(0.299) (0.304) (0.304) (0.319) (0.323)
Ln real GDP per capita (t-1) -0.245** -0.150* -0.137+ -0.136+
(0.091) (0.078) (0.083) (0.084)
China real GDP growth 0.683*** 0.648*** 0.649***
(0.190) (0.189) (0.192)
Net capital inflows -0.189* -0.188*
(0.096) (0.100)
Volatility, S&P 0.018
(0.304)
Constant 8.427*** 7.153*** 9.986*** 3.700+ 4.463* 4.246
(0.734) (1.020) (1.972) (2.157) (2.096) (4.334)
Observations 516 516 489 489 489 489
Adjusted R2 0.0710 0.0740 0.0870 0.0975 0.0997 0.0978
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel SLAC: real domestic demand growth rate (in percent)
39
Results: real domestic demand growth—Central America
and Mexico
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.290** -0.287** -0.237* -0.228* -0.228* -0.227*
(0.111) (0.111) (0.111) (0.115) (0.113) (0.114)
U.S. real interest rate (t-1) -0.178 -0.211 -0.640* -0.918** -1.020** -1.018**
(0.284) (0.364) (0.294) (0.318) (0.323) (0.324)
U.S. real GDP growth (t-1) 0.119 0.498 0.515 0.526 0.536
(0.411) (0.372) (0.370) (0.358) (0.350)
Ln real GDP per capita (t-1) -1.052+ -0.837+ -0.880+ -0.861+
(0.559) (0.486) (0.484) (0.470)
China real GDP growth 0.449* 0.444* 0.445*
(0.225) (0.225) (0.228)
Net capital inflows -0.137+ -0.137+
(0.078) (0.079)
Volatility, S&P 0.060
(0.113)
Constant 6.213*** 5.964*** 14.026** 8.667* 9.828* 9.008*
(0.765) (0.768) (4.821) (4.391) (4.332) (4.432)
Observations 337 337 283 283 283 283
Adjusted R2 -0.0026 -0.0055 0.0180 0.0250 0.0288 0.0254
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel CAM: real domestic demand growth rate (in percent)
40
Results: real domestic demand—Developing Asia
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.849*** -0.845*** -0.861*** -0.846*** -0.853*** -0.848***
(0.155) (0.155) (0.159) (0.158) (0.190) (0.191)
U.S. real interest rate (t-1) -0.286 -0.352 -0.449 -1.177*** -0.964*** -0.952***
(0.364) (0.371) (0.389) (0.264) (0.282) (0.286)
U.S. real GDP growth (t-1) 0.231 0.268 0.329+ 0.210 0.306
(0.214) (0.214) (0.212) (0.234) (0.235)
Ln real GDP per capita (t-1) -1.866** -1.534* -1.490* -1.369+
(0.776) (0.803) (0.821) (0.798)
China real GDP growth 1.123*** 1.184** 1.194**
(0.362) (0.435) (0.438)
Net capital inflows -0.025 -0.022
(0.071) (0.070)
Volatility, S&P 0.618**
(0.239)
Constant 5.779*** 5.303*** 20.338*** 9.051 8.388 0.680
(0.912) (1.009) (6.809) (9.362) (10.176) (10.870)
Observations 778 778 732 732 629 629
Adjusted R2 0.0558 0.0553 0.0733 0.1037 0.0939 0.0988
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel DevAsia: real domestic demand growth rate (in percent)
41
Results: real domestic demand—Developing Europe
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.755** -0.758** -0.870*** -0.845*** -0.889*** -0.886***
(0.208) (0.209) (0.190) (0.193) (0.220) (0.214)
U.S. real interest rate (t-1) 0.436+ 0.470 0.533 -0.292+ -0.840 -0.853
(0.239) (0.441) (0.511) (0.162) (0.688) (0.761)
U.S. real GDP growth (t-1) -0.127 0.176 0.199 0.077 0.091
(0.915) (0.872) (0.858) (0.959) (0.885)
Ln real GDP per capita (t-1) -2.071** -1.703** -1.981** -1.962**
(0.754) (0.596) (0.782) (0.754)
China real GDP growth 1.230 1.581 1.596
(0.866) (1.267) (1.345)
Net capital inflows -0.639 -0.654
(0.692) (0.767)
Volatility, S&P 0.125
(0.725)
Constant 3.052*** 3.321* 24.996** 11.629+ 15.974** 14.426
(0.556) (1.579) (8.372) (6.617) (5.514) (11.367)
Observations 262 262 262 262 255 255
Adjusted R2 0.0180 0.0143 0.0623 0.0764 0.0958 0.0923
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel DevEuro: real domestic demand growth rate (in percent)
42
Results: real domestic demand—Middle East and
Northern Africa
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate -0.632** -0.635** -0.646** -0.645** -0.637** -0.639**
(0.264) (0.267) (0.265) (0.262) (0.258) (0.260)
U.S. real interest rate (t-1) -1.024 -0.983 -1.013 -1.088 -1.098 -1.104
(1.411) (1.300) (1.294) (1.642) (1.643) (1.650)
U.S. real GDP growth (t-1) -0.147 -0.097 -0.092 -0.078 -0.099
(0.553) (0.556) (0.542) (0.539) (0.555)
Ln real GDP per capita (t-1) -0.911* -0.866 -0.838 -0.880
(0.508) (0.622) (0.633) (0.611)
China real GDP growth 0.112 0.100 0.102
(0.592) (0.588) (0.590)
Net capital inflows 0.032 0.031
(0.035) (0.035)
Volatility, S&P -0.163
(0.274)
Constant 8.439** 8.746* 17.315*** 16.036** 15.912** 18.025**
(3.462) (4.416) (5.035) (6.414) (6.460) (6.587)
Observations 633 633 633 633 633 633
Adjusted R2 0.0051 0.0036 0.0028 0.0012 -0.0001 -0.0017
Standard errors in parentheses.
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01.
Panel regression with country fixed-effects and robust standard errors.
Source: authors' calculations.
Panel MENA: real domestic demand growth rate (in percent)
43
Results: exchange rate flexibility and real GDP growth
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate (Fixed reg.) -0.171*** -0.171*** -0.175*** -0.174*** -0.183*** -0.183***
(0.029) (0.029) (0.030) (0.031) (0.031) (0.031)
U.S. real effective exchange rate (Floating reg.) -0.151*** -0.147** -0.136** -0.136** -0.138** -0.141**
(0.056) (0.056) (0.056) (0.056) (0.057) (0.056)
U.S. real interest rate (t-1) -0.085 -0.134+ -0.142* -0.164** -0.169** -0.170**
(0.081) (0.081) (0.083) (0.077) (0.079) (0.078)
U.S. real GDP growth (t-1) 0.179*** 0.205*** 0.206*** 0.251*** 0.223***
(0.064) (0.068) (0.067) (0.065) (0.065)
Ln real GDP per capita (t-1) -0.112 -0.104 -0.124 -0.151
(0.156) (0.156) (0.153) (0.160)
China real GDP growth 0.036 -0.015 -0.022
(0.064) (0.057) (0.057)
Net capital inflows 0.122*** 0.123***
(0.046) (0.045)
Volatility, S&P -0.157***
(0.033)
Constant 4.394*** 4.029*** 4.950*** 4.593*** 4.548*** 6.541***
(0.189) (0.245) (1.303) (1.458) (1.466) (1.648)
Observations 2558 2558 2461 2461 2377 2377
Adjusted R2 0.0197 0.0234 0.0244 0.0243 0.0875 0.0925
Standard errors in parentheses
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01
Panel regression with country fixed-effects and robust std. errors.
Panel All: Real GDP growth rate (in percent)
44
Results: exchange rate flexibility and real domestic
demand growth
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate (Fixed reg.) -0.531*** -0.534*** -0.534*** -0.518*** -0.505*** -0.505***
(0.095) (0.095) (0.099) (0.095) (0.095) (0.095)
U.S. real effective exchange rate (Floating reg.) -0.733*** -0.724*** -0.816*** -0.808*** -0.808*** -0.803***
(0.160) (0.161) (0.163) (0.160) (0.161) (0.162)
U.S. real interest rate (t-1) -0.260 -0.371 -0.477 -0.741+ -0.739+ -0.739+
(0.399) (0.376) (0.396) (0.473) (0.477) (0.477)
U.S. real GDP growth (t-1) 0.404*** 0.478*** 0.497*** 0.504*** 0.546***
(0.152) (0.152) (0.148) (0.148) (0.149)
Ln real GDP per capita (t-1) -0.448+ -0.339 -0.316 -0.276
(0.293) (0.273) (0.265) (0.258)
China real GDP growth 0.443** 0.443** 0.452**
(0.189) (0.191) (0.191)
Net capital inflows -0.040* -0.041*
(0.021) (0.022)
Volatility, S&P 0.233***
(0.088)
Constant 6.472*** 5.648*** 9.338*** 4.838* 4.826* 1.856
(0.913) (1.123) (2.750) (2.591) (2.514) (2.736)
Observations 2505 2505 2408 2408 2377 2377
Adjusted R2 0.0134 0.0141 0.0177 0.0200 0.0195 0.0198
Standard errors in parentheses
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01
Panel regression with country fixed-effects and robust std. errors.
Panel All: Real domestic demand growth rate (in percent)
45
Results: net commodity exporter/importer and real GDP
growth
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate (net comm. exp.) -0.135*** -0.132*** -0.149*** -0.148*** -0.138*** -0.139***
(0.037) (0.037) (0.039) (0.039) (0.043) (0.043)
U.S. real effective exchange rate (net comm. imp.) -0.104*** -0.102*** -0.100*** -0.100*** -0.121*** -0.123***
(0.026) (0.026) (0.028) (0.028) (0.026) (0.026)
U.S. real interest rate (t-1) -0.135* -0.179** -0.176** -0.194*** -0.213*** -0.216***
(0.069) (0.070) (0.074) (0.065) (0.069) (0.069)
U.S. real GDP growth (t-1) 0.153*** 0.176*** 0.178*** 0.219*** 0.196***
(0.050) (0.053) (0.053) (0.055) (0.055)
Ln real GDP per capita (t-1) -0.152* -0.147* -0.148* -0.165**
(0.077) (0.079) (0.076) (0.079)
China real GDP growth 0.028 0.006 0.004
(0.064) (0.066) (0.066)
Net capital inflows 0.120*** 0.121***
(0.038) (0.037)
Volatility, S&P -0.150***
(0.038)
Constant 4.242*** 3.925*** 5.297*** 5.032*** 4.759*** 6.549***
(0.172) (0.204) (0.730) (1.042) (1.086) (1.328)
Observations 3413 3413 3218 3218 2946 2946
Adjusted R2 0.0101 0.0123 0.0156 0.0154 0.0656 0.0687
Standard errors in parentheses
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01
Panel regression with country fixed-effects and robust std. errors.
Panel All: Real GDP growth rate (in percent)
46
Results: net commodity exporter/importer and real
domestic demand growth
(1) (2) (3) (4) (5) (6)
U.S. real effective exchange rate (net comm. exp.) -0.683*** -0.677*** -0.750*** -0.739*** -0.745*** -0.744***
(0.131) (0.132) (0.141) (0.138) (0.147) (0.147)
U.S. real effective exchange rate (net comm. imp.) -0.690*** -0.687*** -0.706*** -0.694*** -0.684*** -0.682***
(0.085) (0.085) (0.090) (0.089) (0.094) (0.094)
U.S. real interest rate (t-1) -0.604* -0.694** -0.760** -1.134*** -1.102*** -1.100***
(0.306) (0.289) (0.312) (0.364) (0.388) (0.389)
U.S. real GDP growth (t-1) 0.319* 0.366** 0.398** 0.399** 0.421**
(0.162) (0.164) (0.161) (0.170) (0.173)
Ln real GDP per capita (t-1) -0.556*** -0.449** -0.433** -0.417**
(0.202) (0.183) (0.176) (0.175)
China real GDP growth 0.589*** 0.574*** 0.576***
(0.172) (0.182) (0.182)
Net capital inflows -0.020 -0.020
(0.029) (0.029)
Volatility, S&P 0.139
(0.106)
Constant 6.808*** 6.150*** 11.229*** 5.650*** 5.777*** 4.118+
(0.749) (0.944) (2.168) (2.117) (2.115) (2.569)
Observations 3304 3304 3121 3121 2946 2946
Adjusted R2 0.0200 0.0204 0.0257 0.0300 0.0275 0.0274
Standard errors in parentheses
+ p<0.15, * p<0.10, ** p<0.05, *** p<0.01
Panel regression with country fixed-effects and robust std. errors.
Panel All: Real domestic demand growth rate (in percent)
47
Weaker commodity prices, slower investment growth in
emerging markets (Magud & Sosa 2015)
-40-20
02040
2004 2006 2008 2010 2012 2014
Real private investment Commodity export price
Real Private Investment and Commodity Export Price Growth, 2004–141
(Percent change )
Sources: IMF, World Economic Outlook; Gruss 2014; and IMF staff calculations. 1 PPP-weighted average.
-40
-20
0
20
40
2004 2006 2008 2010 2012 2014
Commonwealth of Independent States
-30
-20
-10
0
10
20
30
2004 2006 2008 2010 2012 2014
Emerging Europe
-30
-20
-10
0
10
20
30
2004 2006 2008 2010 2012 2014
Latin America and the Caribbean
-20
-10
0
10
20
30
40
2004 2006 2008 2010 2012 2014
Asia excluding China
48
Results: baseline (1) (2) (3) (4) (5) (6)
VARIABLES ICR ICR ICR ICR ICR ICR
Q 0.0231*** 0.0226*** 0.0200*** 0.0188*** 0.0184*** 0.0179***
(0.00514) (0.00510) (0.00508) (0.00490) (0.00465) (0.00465)
Cash flow 0.00406** 0.0118*** 0.0114*** 0.0114*** 0.0112***
(0.00161) (0.00208) (0.00221) (0.00219) (0.00212)
Leverage (t-1) -0.0340*** -0.0323*** -0.0315*** -0.0318***
(0.00345) (0.00292) (0.00305) (0.00315)
Interest expense ratio (t-1) -0.0448* -0.0415 -0.0394 -0.0421
(0.0261) (0.0274) (0.0281) (0.0281)
Change in debt 0.00334*** 0.00296*** 0.00292*** 0.00291***
(0.000911) (0.00100) (0.00101) (0.00101)
Commodity export price (t-1) 0.000445*** 0.000475*** 0.000461***
(0.000105) (9.97e-05) (0.000101)
Net capital inflows 0.00255*** 0.00260***
(0.000680) (0.000709)
Uncertainty 3.80e-06
(3.32e-06)
Constant 11.75*** 11.77*** 10.94*** 10.28*** 10.04*** 9.832***
(0.953) (0.942) (1.010) (0.806) (0.863) (1.013)
Observations 121,047 121,006 83,921 64,276 64,276 63,460
Number of firms 18,624 18,621 15,165 12,317 12,317 12,280
Number of countries 38 38 38 36 36 36
R2
0.0203 0.0239 0.0352 0.0345 0.0414 0.0416
Source: Authors' calculations.
Note: Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.1 Robust standard errors (clustered by country), and controling for time effects and firm-level fixed effects.
49
Baseline results: EMs, LAC
Investment-Capital Ratio Response to 1 Standard Deviation Shock to RHS Variables
(Percentage points)
2.9 5.3 3.3 1.9 0.6 1.4
3.5
15.0
3.2
7.5
3.2 3.8
0
2
4
6
8
10
12
14
16
Tobin's Q Cash flow Leverage Change
in debt
Commodity
export
prices
Capital
inflows
Full sample LAC
50
Recent slowdown: Contributions1
(Main effects, percent)
-25
-20
-15
-10
-5
0
5
10
LAC Asia Europe & CIS EMs total
Tobin's Q Cash flow Leverage Change in debt
Capital inflows Comm. Exp. price growth Actual ICR Predicted ICR
Source: IMF staff calculations. 1 Relative contribution of each factor to the 2011–13 investment slowdown (averaged across firms in each region). Contributions computed
based on region-specific regression results.
51
Lift-off: Financial shocks and firm-level investment
(Li, Magud, & Valencia 2015)
• High global financial volatility, higher borrowing costs, often
followed by declines in firms’ capital expenditures in EMs
• To what extent firm & country fundamentals reduce/increase
the response of investment? Through what channels? 52
Lift-off: Financial shocks and firm-level investment
53
Lift-off: Financial shocks and firm-level investment
54
Lift-off: Financial shocks and firm-level investment
• Owing to firm heterogeneity, regardless of the shock, stronger responses
by firms with relatively weaker balance sheets (higher net leverage)
• Effects on MPI depend on the shock
– After interest-rate shocks, MPI increases: Ability
– After uncertainty shocks, MPI decreases: Willingness
• Country fundamentals matter: weaker response of investment when
public debt is low, foreign reserves is high, or financial deepening is high
55
Lift-off: Financial shocks and firm-level investment
56
Lift-off: Financial shocks and firm-level investment
57
Capital Inflow booms: Exchange rate flexibility matters
(Magud, Reinhart, Vesperoni 2014)
• Exchange rate flexibility affect domestic credit in EME during capital inflows bonanzas:
– Less flexible regimes associated with larger volumes of domestic credit
– Less flexible regimes also associated with higher share of FX credit
– No clear relationship between flexibility and capital flows: when it rains, it rains everywhere
58
– Robustness: country and time effects, cross-section weights, period weights, IV
C 13.53 *** 60.02 *** -1.10
Capital Inflows 1.04 *** 0.55 *
Exchange Rate Regime -4.26 *** -14.14 *** 0.27
Inflation (-1) -0.01 0.11
Broad Money/GDP 0.71 ***
Dummy Crisis 26.81 * 16.13 -11.33 **
Domestic deposit in FC/Tot Deposits 0.27 ***
Interest Rate Differential 0.75 ***
Financial Deepness (-1) -0.01
Financial Integration (-1) 0.92 ***
Trade Openness (-1) 0.04 ***
Real GDP 0.00
Output Growth -0.08
External Debt/GDP (-1) 0.05 ***
International Interest Rate 0.00
Observations 202 150 202
Adjusted R-squared 0.57 0.31 0.30
Prob(F-statistic) 0.0000 0.0000 0.0000
Table 1. Main Results.
FX Credit/Total Credit Capital Inflows/GDPCredit/GDP
59
Policy Implications
• ER flexibility matters in policy-mix to cope with KI: lack of it countries more vulnerable to credit booms and reversals
– Lower ER flexibility:
• Stronger external funding in banking sector
• More foreign currency lending, no currency mismatch at the cost of credit risk
– Interest rate differentials matter for borrowers
• Macro-prudential may ‘counteract’ lack of flexibility by:
– Reducing incentives for banks to tap external markets
– Contain domestic credit and reduce interest rate differentials
– Place incentives for banks to factor in credit risk from foreign currency lending 60
Macro prudential
• Increasing currency-dependent reserve requirements (CRR) and/or
marginal CRR on external wholesale financing can reduce
– (i) incentives to tap external markets
– (ii) interest rate differentials
• Increasing capital requirements/introducing dynamic provisioning on FX-loans
to internalize credit risks associated w/ borrowers’ currency mismatches
• Tightening debt-to-income and loan-to-value ratios to contain credit directly,
and complement monetary policy efforts
61
Capital flow reversals (Magud & Vesperoni 2015)
• During capital flows reversals (KFR)
– Is bank credit still more resilient in Flex? Yes, but partially
• Though smoother, flex also experience credit reversals (no perfect shield): ticket to purgatory, but no entrance to paradise
• Credit recovery puzzle: well after capital flows reverse, credit growth remains tepid in flex
– Different ERR call for different macroprudentials? Yes, to some extent
– LTV, RR, DSTI in fixed (contain credit growth during boom)
– CS, DP in flex (build buffers for credit growth during after KFR)
– Does net vs. gross outflows matter? No. Results hold for net & gross inflows
– As controls to baseline
– If used to defined KFR
62
Methodology
• Theory: Vegh (2013)
• Capital inflows booms (KIB):
– Distributional criteria (Reinhart & Reinhart, 2009) • Top 20th percentile
– Cyclical deviations (Mendoza & Terrones, 2008, 2012) • KIB cyclical deviations larger than (m*cycl. deviation)
– m= 1.0, 1.5, 1.75, 2.0
• Capital flows reversal (KFR): conditional on KIB, KF drop of at least 10% from peak (robust to alternative thresholds)
• Net and gross flows to define KIB and KFR
63
Stylized facts: macro variables
Real GDP growth (percent) External current account (percent of GDP)
Saving (percent of GDP)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
RR-Flex RR-Fix
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
RR-Flex RR-Fix
15
16
17
18
19
20
21
T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
RR-Flex RR-Fix
Investment (percent of GDP)
Consumption (percent of GDP)
19
20
21
22
23
24
25
26
T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
RR-Flex RR-Fix
79
80
81
82
83
84
85
86
T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
RR-Flex RR-Fix
Stylized facts: Credit
– Credit growth: consistently
higher in fixed regimes, but
less so during reversals
– Containing credit growth during
the boom is the key policy
challenge for fixed regimes
– Supporting credit recovery
seems to be a policy challenge
for flexible regimes after
reversals 0
1
2
3
4
5
6
7
8
9
10
T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
Credit Growth Differential(In percent)
- 4
- 2
0
2
4
6
8
10
12
14
T - 5 T - 4 T - 3 T - 2 T - 1 T T+1 T+2 T+3 T+4 T+5
RR - Flex RR - Fix
Real Credit Growth (In percent)
65
– Fixed regimes are exposed to
sharp adjustments in non-
deposit funding
– The credit impulse is more
procyclical in economies with
fixed exchange rate regimes
– Consumption growth-banking
credit nexus
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
RR-Flex
RR-Fix
Banking Sector Loan to Deposit Ratio(In percent)
-6
-5
-4
-3
-2
-1
0
1
2
3
4
T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5
Credit impulse Flex
Credit impulse Fix
Credit Impulse(In percent)
66
Stylized facts: Credit
R & R Cross-section Baseline Regional Time effect IV baseline IV regional IV period Reversal
(1) (2) (3) (4) (5) (6) (7) VARIABLES real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth cred_reversal
Financial account balance 0.000263* 0.000262* 0.000240* 8.85e-05 0.000206 0.000178 (0.000147) (0.000145) (0.000146) (0.000181) (0.000137) (0.000137)
Real GDP (RGDP) growth 1.763*** 1.697*** 1.712*** 1.572*** 1.734*** 1.726*** (0.120) (0.121) (0.121) (0.151) (0.123) (0.125)
Broad money real growth 0.624*** 0.605*** 0.626*** 1.428*** 0.652*** 0.665*** (0.0314) (0.0318) (0.0312) (0.133) (0.0327) (0.0323)
Real effective exchange rate (REER) 11.35*** 12.98*** 11.57*** 9.152** 11.92*** 10.50*** (3.450) (3.445) (3.430) (4.251) (3.734) (3.736)
Exchange rate regime -3.155*** -3.740*** -3.197*** -2.645*** -3.836*** -3.080*** -2.093* (0.462) (0.540) (0.458) (0.571) (0.741) (0.640) (1.278)
Lagged credit/GDP 1/ -0.0532*** -0.0600*** -0.0506*** -0.0861*** -0.0879*** -0.0749*** (0.0109) (0.0122) (0.0108) (0.0144) (0.0150) (0.0138)
Latin America dummy -9.214* -11.14 (5.169) (7.104)
Emerging Europe dummy -1.473 -2.368 (4.418) (6.191)
ASEAN 5 dummy -2.966 -3.994 (5.302) (7.284)
Central & East Europe dummy -4.677* -6.113* (2.793) (3.632)
Other advanced countries dummy -7.149 -8.003 (5.223) (7.180)
Average RGDP growth during boom 1.377** (0.545)
Average finan. account bal boom 0.00546*** (0.00122)
Average REER during boom 19.51 (18.94)
Average real broad mon growth boom 0.551*** (0.199)
Constant -1.030 6.377 -0.426 4.000 10.63 2.010 -12.74 (3.626) (6.419) (3.889) (4.543) (8.251) (4.232) (19.32)
Observations 1,148 1,148 1,148 1,141 1,141 1,141 124 R-squared 0.358 0.418 0.413 0.355 Number of countries 129 129 129 129 129 129 Chi squared 749.2 793.3 783.3 361.7 796.9 800.0 Log likelihood -4636 -4622 -4625 -500.5 Source: authors' calculations. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 1/ The lagged credit to GDP ratio is a proxi for financial deepness in banking credit.
Panel: credit growth
67
M & T Cross-section
Baseline Regional Time effect IV baseline IV regional IV period Reversal (1) (2) (3) (4) (5) (6) (7)
VARIABLES real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth cred_reversal
Financial account balance 0.000247 0.000243 0.000220 0.000160 0.000219 0.000189
(0.000200) (0.000199) (0.000199) (0.000211) (0.000196) (0.000196) Real GDP (RGDP) growth 1.807*** 1.806*** 1.751*** 1.804*** 1.920*** 1.874***
(0.146) (0.146) (0.147) (0.163) (0.156) (0.158) Broad money real growth 0.488*** 0.472*** 0.491*** 0.883*** 0.445*** 0.464***
(0.0377) (0.0383) (0.0374) (0.139) (0.0430) (0.0424) Real effective exchange rate (REER) 5.864 6.540 6.054 4.529 7.961* 7.261
(4.118) (4.159) (4.087) (4.715) (4.669) (4.641) Exchange rate regime -4.549*** -5.027*** -4.602*** -4.308*** -5.225*** -4.790*** -2.261^
(0.653) (0.728) (0.648) (0.737) (0.881) (0.809) (1.794) Latin America dummy -2.785** -2.879*
(1.377) (1.672) Emerging Europe dummy 4.549 6.665
(4.652) (5.605) ASEAN 5 dummy -0.762 -0.872
(2.170) (2.636) Central & East Europe dummy -2.236 -3.105
(4.587) (5.534) Other advanced countries dummy -1.652 -2.253
(1.810) (2.191) Average RGDP growth during boom 1.934***
(0.626) Average finan. account bal boom 9.173
(18.82) Average REER during boom 0.00483***
(0.00104) 0.586***
(0.211) Constant 3.364 4.662 2.615 5.254 3.022 1.398 -4.710
(4.268) (4.425) (4.670) (4.904) (5.015) (5.220) (19.44)
Observations 1,186 1,186 1,186 1,069 1,069 1,069 114
R-squared 0.224 0.258 0.263 0.364
Number of countries 118 118 118 118 118 118
Chi squared 414.6 427.0 443.5 253.2 351.2 361.4
Log likelihood -5150 -5146 -5140 -471.3
Sources: authors' calculations. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1, ^ p<0.15
Panel: credit growth
68
(1) (2) (3) (4) (5) (6)
VARIABLES real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth
Net Non-FDI flows (percent of GDP) 0.0905 0.0167 0.0523 0.0671 0.0252 0.0265
(0.0675) (0.0688) (0.0680) (0.0686) (0.0698) (0.0695)
Real GDP growth 1.992*** 2.014*** 1.949*** 1.981*** 2.014*** 1.955***
(0.157) (0.155) (0.158) (0.159) (0.157) (0.161)
Broad money real growth 0.377*** 0.337*** 0.379*** 0.386*** 0.360*** 0.382***
(0.0412) (0.0416) (0.0410) (0.0454) (0.0456) (0.0452)
Real effecttive exchange rate (REER) 10.76*** 13.05*** 11.35*** 12.48*** 14.18*** 12.90***
(3.720) (3.727) (3.692) (4.154) (4.066) (4.080)
Exchange rate regime -3.096*** -3.007*** -3.219*** -2.914*** -3.140*** -3.124***
(0.581) (0.619) (0.577) (0.830) (0.811) (0.780)
Lagged credit to GDP -0.0384*** -0.0249* -0.0339*** -0.0658*** -0.0526*** -0.0533***
(0.0123) (0.0141) (0.0122) (0.0159) (0.0169) (0.0154)
Latin America -1.374 -2.911
(1.487) (1.928)
Emerging Europe 8.342*** 8.158**
(2.690) (3.392)
ASEAN 5 3.476** 3.462
(1.738) (2.261)
Central East Europe -4.088 -5.408
(2.649) (3.355)
Constant -2.602 -7.075 -1.422 -3.206 -5.713 -1.830
(4.043) (4.481) (4.301) (4.673) (5.070) (4.787)
Observations 709 709 709 702 702 702
Number of events 84 84 84 84 84 84
Chi squared 345.4 387.3 370.6 321.9 138.9 135.4
Log likelihood -2822 -2808 -2814
R-squared 0.333 0.366 0.352
*** p<0.01, ** p<0.05, * p<0.1
Standard errors in parentheses. Instruments: lagged real GDP growth and lagged broad money real growth.
Net Non-FDI flows (percent of GDP)
69
(1) (2) (3) (4) (5) (6)
VARIABLES real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth
Gross non-FDI flows (percent of GDP) 0.0487 0.0328 0.0395 0.0800* 0.0706 0.0650
(0.0429) (0.0422) (0.0423) (0.0439) (0.0437) (0.0439)
Real GDP growth 1.608*** 1.652*** 1.518*** 1.418*** 1.460*** 1.360***
(0.172) (0.168) (0.174) (0.165) (0.164) (0.170)
Broad money real growth 0.486*** 0.420*** 0.501*** 0.472*** 0.446*** 0.482***
(0.0553) (0.0556) (0.0545) (0.0533) (0.0538) (0.0534)
Real effecttive exchange rate 18.32*** 20.71*** 18.85*** 21.14*** 21.96*** 21.97***
(4.690) (4.696) (4.575) (5.224) (5.192) (5.158)
Exchange rate regime -3.090*** -3.056*** -3.309*** -3.368*** -3.497*** -3.547***
(0.761) (0.759) (0.743) (1.178) (1.134) (1.126)
Credit to GDP (t-1) -0.0387** -0.0360** -0.0283* -0.102*** -0.101*** -0.0811***
(0.0157) (0.0171) (0.0156) (0.0234) (0.0243) (0.0227)
Latin America -3.070* -5.782**
(1.731) (2.745)
Emerging Europe 4.398 1.396
(2.744) (4.424)
ASEAN 5 2.953 2.142
(2.447) (4.009)
Central East Europe 0.0103 0.878
(2.639) (4.324)
Constant -9.782* -13.04** -9.330* -8.212 -7.671 -8.888
(5.090) (5.544) (5.139) (6.008) (6.577) (6.045)
Observations 431 431 431 431 431 431
Number of events 59 59 59 59 59 59
Chi Squared 248.5 289.6 288.9 266.7 159.7 292.7
Log likelihood -1699 -1686 -1686
r2_o 0.340 0.382 0.381
Standard errors in parentheses. Regressions (4)-(6) instrumented using lagged real GDP growth and lagged broad money real growth.
*** p<0.01, ** p<0.05, * p<0.1
Gross non-FDI flows
70
Purgatory, but no paradise (stability of coefficients test)
-6-4
-20
beta
_Coa
rse
-5 0 5episode
time window is 2 (episode)confidence level = .05
Dependant variable: real_credit_growth
-4.4
-2.11
71
Summary of results
• Main empirical result:
– Flex ERR contain KF-driven credit expansion during boom
• “Cushions” reversal when KF retrench, but no panacea
• Stronger cycles in more rigid regimes
• Recovery puzzle in flexible regimes
– Trilemma, not dilemma: Rey (2013) vs., ours and Obstfeld (2014)
• Exchange rate flexibility does matter
– Net and gross flows; excluding FDI (equity bonds): no difference
72
Policy implications
– MRV (2014): fix stands to benefit the most from MPP
– …yet flex could benefit as well (credit recovery puzzle)
– All MPP may help, but main policy objective may differ
• Curbing credit growth during booms, critical in fix:
– Loan-to-value, Debt-to-income, Debt Service-to-income, Reserve Requirements.
• Containing fall in flex during reversal, critical in flex: countercyclical capital requirements/provisions
– Capital surcharges, Dynamic Provisioning
73
Capital controls don’t work (Magud, Reinhart, Rogoff 2011; Magud and Reinhart 2007)
• Policy makers in many emerging market economies seem possessed by FOUR FEARS:
– Fear of an appreciation (a cousin of fear of floating)
– Fear of “hot money”
– Fear of large inflows (capital account reversals are usually painful)
– Fear of loss of monetary autonomy 74
However, controls on inflows…
– Make monetary policy more independent? Yes
– Alter the composition of capital flows? Yes
– Reduce real exchange rate pressures? Mostly No (more controversial)
– Reduce the volume of net flows (hence, CAB): No
75
… and controls on outflows
• In Malaysia,
– controls reduced outflows, and
– Gave some room for more independent monetary policy
• Not much effectiveness in other cases
76
Wrapping up • AEs growth and inflation divergence (could widen going forward)
• For EMs
– Stronger U.S. growth, expansionary via external demand; but,
– Stronger dollar slows EMs growth (weakens domestic demand)
• Income effect: commodity prices offsets expenditure-switching effect; also for capital/inputs importers
• Persistent dollar cycles: EMs’ subdued growth for some time
• U.S. tightening, further appreciation, amplifies effects
– Weaker investment
• Weaker commodity prices, slower investment growth
• Exchange rate flexibility helps buffer effects of capital flows’ cycles
• Capital control, not very effective
• Macro-fundamentals matter 77
THANK YOU!
Advanced Economies
Divergences,
Emerging Markets
Convergence?
Nicolas E. Magud International Monetary Fund
Jornadas Económicas 2016
Guatemala
The views expressed in this presentation are those of the presenter and do not necessarily represent the views of the
IMF, its Executive Board, or IMF management.
Related literature
• I. Dollar—commodity prices link
– Frankel (1986)
– Dornbusch (1986)
– Borensztein and Reinhart (1994)
– Akram (2009)
• II. Dollar cycles
– Engel and Hamilton (1990)
– Chinn (2015)
• III. This paper: links I with II 80
Data
• Sample: 63 emerging market economies
• Frequency/time span: annual data 1970—2014
• Sources:
– IMF’s WEO and IFS
– St. Louise Fed’s FRED
– Bloomberg
– Gruss (2014) 81
The missing link: commodity terms of trade real exchange
rates South America and Mexico: Real Effective Exchange Rates
(Index: 2005=100)
70
90
110
130
150
170
190
210
230
2000 2002 2005 2007 2010 2012 2015
Consumer Price Index Commodity terms of trade¹
Sources: IMF, Information Notice System; Gruss (2014); and IMF staff calculations.
Note: South America = Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.
¹ Calculated using net commodity terms of trade data based on Gruss 2014 (instead of domestic consumer price indices) for the partner countries. 82
Theory I: supply side
Non-tradables:
Tradables:
Taking prices as given, optimally: ; gL=w
Thus,
; ' 0; '' 0N N
t ty g L g g
; ; 0; 0; 0; 0H H
t t t L M LL MMy f L M f f f f
L
M
M
f w
f p
;H M
t t tp w p N
t tp w
83
Theory II: domestic demand and market clearing
conditions
Agent solves
s.t.
In equilibrium:
Market clearing conditions
with trade balance
inelastically supplied imports
demand for exports
, ,
; ;N H M
N H M
c c cmax u c c c
; N N H H M M
N HwL p c p c p c L L L
; ; M M M M H H
N N H H N N
u p u p u p
u p u p u p
H Hy c X
H M Mp X p c M
S MM M c
;M
Hp
X Xp
' 0X
84
Theory III: U.S. appreciation shock
• U.S. real appreciation as higher (pM/pH): ,
• Case 1: Leontieff production function
– Lower demand for imports, decrease real wage
• Consumer: lower wages, negative income effect
– lower aggregate consumption
– relative price of non-tradables decreases: lower domestic demand owing to lower wages, in equilibrium lower production
– relative price change
– Substitution effect: basket composition changes: given optimal marginal utility ratios and income effect:
0Mp 0Hp
H M
HL HMp a w a p
0 M
HL HMa w a p 0MHM
HL
aw p w
a
0 0 0M H Np p p
0N H Mc c c 85
Theory IV: other production function • Cobb-Douglas
– Given then, ambiguous
• Linear production function fL/fM=a/b
• Extensions: – Financial account balance: EM’s capital outflows increase with higher U.S. interest
rates, depreciate currency (further reducing price of non-tradables)
– Credit markets: borrow to invest amplifies capital outflows effects
• In the end: empirical issue
1( )Hy L M
1;
HH
L M
yyf f
L M
1
M
wLM
p
1
11H
M M M M
y w L
p p p p
01M
MLp w
H
M
y
p
Hy aL bM
86
Econometric model
• Vector notation
• Extended form
• Panel regression with country fixed effects and
robust standard errors
i US i
t t t ty X Z
1
1
US
t
US US
t t
US
t
REER
X RIR
RGDPgr
1
1
i
t
CH
t
t i
t
US
t
RGDPpc
RGDPgrZ
KI
Vol
1 2 1 3 1
1 1 2 3 1 4
i US US US
t t t t
i CH i US
t t t t
y REER RIR RGDPgr
RGDPpc RGDPgr KI Vol
87
Robustness
• Lagged REER of each country (expenditure-switching/income effs.)
• 5-year averages (longer-term perspective)
• Alternative volatility measure, VIX
• Log-difference of commodity terms of trade (significantly only if U.S REER removed, not
otherwise)
• Rolling-expanding regressions
– China only significant since late 1990s
– Results holds for more regions if run separately
• Dummy variable for crisis
• Time effects
• Robust standard errors clustered by time
• Restricted sample (starting in 1999)
88
United States: Contribution to Real GDP Growth
(Percentage points; seasonally-adjusted annual rates)
Source: IMF staff estimates.
89
2015 2016 2017
Real GDP 2.4 2.4 2.5
Personal consumption expenditures 2.1 2.0 1.9
Gross private domestic investment 0.8 0.7 0.9
Fixed investment 0.6 0.7 0.8
Change in private inventories 0.2 0.0 0.0
Net exports of goods and services -0.6 -0.5 -0.5
Government consumption and investment 0.1 0.2 0.2
Main contribution to growth: consumption
Econometric specification
• About 16,000 EM (listed) firms (Worldscope)
– 38 countries
– 1990-2013
– Annual frequency
• Country-specific commodity export prices (Gruss 2014)
• Financial account balance (% GDP) (IFS, WEO)
• Stock market volatility (Bloomberg)
, , ,
1 , 2 3 , 1 4 5 , 6 , 1
, 1 , 1 , 1
7 , 8 , ,
ic t ic t ic t x
ic t ic t ic t c t
ic t ic t ic t
c t c t i t ic t
I CF DebtQ Lev Int P
K K K
KI Unc d d
90
Lift-off: Financial shocks and firm-level investment
91
Dependent Variable: Domestic Credit/GDP
IV
(1) (2) (3) (4) (5) (6) (7) a/
C 13.53 *** -5.86 15.38 *** 18.79 ** 9.32 *** 12.82 *** 10.42 ***
Capital Inflows 1.04 *** 0.94 *** 0.93 *** 1.02 *** 0.55 *** 1.04 *** 1.41 ***
Exchange Rate Regime -4.26 *** -5.19 *** -4.59 *** -4.55 *** -2.59 *** -3.68 *** -4.05 ***
Inflation (-1) -0.01 0.00 0.00 0.01 -0.01 * -0.01 -0.01
Broad Money/GDP 0.71 *** 1.16 *** 0.70 *** 0.61 *** 0.75 *** 0.69 *** 0.74 ***
Dummy Crisis 26.81 * 31.12 *** 26.68 * 29.31 *** 18.85 ** 26.73 ** 29.18 ***
Fixed Effects No Yes No Yes No No No
Time Effects No No Yes Yes No No No
Cross-Section Weights No No No No Yes No No
Period Weights No No No No No Yes No
Observations 202 202 202 202 202 202 177
Adjusted R-squared 0.58 0.90 0.59 0.91 0.65 0.59 0.57
Prob(F-statistic) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 -
a/ Instruments are lagged independent variables for capital inflows, inflation, and broad money, corrected for heteroscedasticity using weighting matrix.
Table A.1. The Exchange Rate Regime and Domestic Credit
GLSOLS
92
Dependent Variable: Domestic Credit in Foreign Currency/Total Domestic Credit
IV
(1) (2) (3) (4) (5) (6) (7) a/
C 60.02 *** 38.42 *** 60.69 *** 37.74 *** 49.75 *** 59.40 *** 65.62 ***
Capital Inflows 0.55 * 0.42 *** 0.54 * 0.30 ** 0.93 *** 0.62 ** 0.82 **
Exchange Rate Regime -14.14 *** -4.17 ** -14.48 *** -3.88 ** -11.14 *** -14.04 *** -17.09 ***
Domestic deposit in FC/Tot Deposits 0.27 *** 0.35 *** 0.27 *** 0.34 *** 0.33 *** 0.27 *** 0.21 **
Inflation (-1) 0.11 0.18 *** 0.13 0.28 *** 0.09 0.11 0.08
Interest Rate Differential 0.75 *** 0.06 0.75 *** 0.08 0.45 *** 0.76 *** 1.13 ***
Dummy Crisis 16.13 -5.51 15.56 -14.03 21.13 *** 16.18 17.21
Fixed Effects No Yes No Yes No No No
Time Effects No No Yes Yes No No No
Cross-Section Weights No No No No Yes No No
Period Weights No No No No No Yes No
Observations 150 150 150 150 150 150 131
Adjusted R-squared 0.33 0.94 0.34 0.95 0.78 0.34 0.32
Prob(F-statistic) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 .
a/ Instruments are lagged independent variables (except for inflation and the dummy for crisis), corrected for heteroscedasticity using weighting matrix.
Table A.2. The Exchange Rate Regime and Credit Composition
GLSOLS
93
Regression analysis
• Panel
• Cross-section
94
R & R--restricted sample 1/ Cross-section Baseline Regional Time effect IV baseline IV regional IV period Reversal
(1) (2) (3) (4) (5) (6) (7) VARIABLES real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth cred_reversal
Financial account balance 0.000243 0.000246* 0.000218 0.000134 0.000202 0.000170 (0.000149) (0.000148) (0.000149) (0.000161) (0.000137) (0.000137)
Real GDP (RGDP) growth 1.821*** 1.754*** 1.766*** 1.854*** 1.865*** 1.855*** (0.123) (0.124) (0.124) (0.137) (0.129) (0.130)
Broad money real growth 0.570*** 0.548*** 0.572*** 1.114*** 0.632*** 0.646*** (0.0317) (0.0324) (0.0315) (0.126) (0.0350) (0.0344)
Real effective exchange rate (REER) 12.40*** 12.98*** 12.71*** 12.44*** 11.76*** 10.99*** (3.492) (3.471) (3.476) (4.036) (3.954) (3.975)
Exchange rate regime -3.286*** -3.708*** -3.319*** -3.278*** -3.461*** -3.348*** -2.364* (0.455) (0.562) (0.451) (0.509) (0.765) (0.636) (1.221)
Latin America dummy -10.51** -9.795 (5.029) (6.889)
Emerging Europe dummy -1.843 -1.054 (4.296) (5.988)
ASEAN 5 dummy -5.361 -5.128 (5.182) (7.098)
Central & East Europe dummy -5.349** -5.620 (2.706) (3.535)
Other advanced countries dummy -9.881* -10.40 (5.073) (6.956)
Average RGDP growth during boom 1.688*** (0.525)
Average finan. account bal boom 0.00611*** (0.00116)
Average REER during boom 14.49 (19.56)
Average real broad mon growth boom 0.416** (0.190)
Constant -4.465 4.987 -4.256 -3.791 5.030 -2.464 -8.996 (3.629) (6.292) (3.895) (4.200) (8.142) (4.388) (19.94)
Observations 1,202 1,202 1,202 1,081 1,081 1,081 118 R-squared 0.350 0.393 0.389 0.333 Number of countries 123 129 123 123 123 123 Chi squared 641.2 825.5 672.8 354.4 660.3 666.9 Log likelihood -4877 -5146 -4867 -471.7 Source: authors' calculations. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 1/ The sample excludes those episodes where the exchange rate regime switched at the time capital flows reversed.
Panel: credit growth
95
(1) (2) (3) (4) (5) (6)
VARIABLES real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth real_credit_growth
Net non-FDI flows (percent of GDP) 0.110 0.0133 0.0930 0.110 0.0575 0.0886
(0.0793) (0.0790) (0.0793) (0.0807) (0.0809) (0.0820)
Real GDP growth 1.551*** 1.629*** 1.473*** 1.555*** 1.596*** 1.484***
(0.158) (0.152) (0.160) (0.155) (0.153) (0.159)
Broad money real growth 0.447*** 0.383*** 0.459*** 0.448*** 0.410*** 0.454***
(0.0493) (0.0491) (0.0492) (0.0502) (0.0502) (0.0505)
Real effecttive exchange rate 12.63*** 17.02*** 13.34*** 10.17** 13.99*** 11.13***
(3.798) (3.749) (3.764) (4.232) (4.110) (4.253)
Exchange rate regime -3.028*** -2.941*** -3.072*** -2.965*** -3.047*** -2.994***
(0.609) (0.643) (0.601) (0.895) (0.846) (0.886)
Credit to GDP (t-1) -0.0185 -0.0128 -0.0140 -0.0480*** -0.0404** -0.0416**
(0.0130) (0.0144) (0.0130) (0.0184) (0.0183) (0.0184)
Latin America -3.411** -4.523**
(1.574) (2.113)
Emerging Europe 6.599*** 4.992
(2.426) (3.286)
ASEAN 5 5.494*** 6.037**
(2.067) (2.839)
Central East Europe -2.173 -1.961
(2.311) (3.189)
Constant -4.483 -10.33** -3.726 -0.457 -4.671 -0.279
(4.226) (4.645) (4.409) (4.895) (5.309) (5.125)
Observations 531 531 531 531 531 531
Number of events 70 70 70 70 70 70
Chi Squared 264.2 330.9 289.5 116.2 148.3 275.8
ll -2091 -2069 -2082
r2_o 0.325 0.379 0.346
Standard errors in parentheses. Regressions (4)-(6) instrumented using lagged real GDP growth and lagged broad money real growth.
*** p<0.01, ** p<0.05, * p<0.1
Net non-FDI flows
96