U.S. Monetary Policies Making Emerging Economies Vulnerable: IMF

“I am convinced that, without these unconventional tools, the world would have sunk into a 1930s-style depression,” she said.

“Unconventional monetary policies have also led to negative spillover effects on emerging markets through a build-up of financial stability risk. These policies triggered huge capital inflows into emerging financial markets.

The IMF chief said that between 2009 and the end of 2012, emerging markets received USD 4.5 trillion of gross capital inflows, representing about half of global capital flows during that period.

“This led to a significant increase in bond and equity prices and to a strengthening of emerging market currencies. IMF studies suggest that these effects were larger than the ones that had been caused by conventional policies in the past,” she said.

These spillovers pose a risk to financial stability in emerging markets, because policy changes could easily lead to a sudden reversal of capital flows, she said.

Referring to the volatility suffered by emerging markets over the speculation of rise of US interest rates, she said, “We already saw a preview of this scenario during the so-called ‘taper tantrum’ in the summer of 2013. Merely the first hint of a change in US monetary policy was enough to trigger a surge in financial market and capital flow volatility.”
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