Chapter

What Hurts Emerging Markets Most?

Edited by Carmen M. Reinhart and Vincent Raymond Reinhart

in Preventing Currency Crises in Emerging Markets

Published by University of Chicago Press

Published in print November 2002 | ISBN: 9780226184944
Published online February 2013 | e-ISBN: 9780226185057 | DOI: http://dx.doi.org/10.7208/chicago/9780226185057.003.0004
What Hurts Emerging Markets Most?

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This chapter explores whether reducing Group of Three (G3) exchange rate volatility would decrease emerging markets' macroeconomic vulnerability. It specifically outlines the “traditional” North-South links via trade, commodity markets, and capital flows, and adds transmission channels in the form of interest rate and exchange rate volatilities. It is noted that trading higher for lower G3 exchange rate volatility, even at the cost of more volatility in either U.S. interest rates or consumption, would benefit growth. Moreover, advocates of G3 target zones have to determine another mechanism by which financial market volatility in the industrial countries hits their neighbors to the South beyond that expected through the flows of trade (with their associated effects on income) or capital. The data generally raises several important questions, implying that the welfare effects of attempts to stabilize the G3 on the emerging markets are ambiguous. Thus, resolving these ambiguities needs additional exploration.

Keywords: Group of Three; exchange rate volatility; macroeconomic vulnerability; trade; commodity markets; capital flows; interest rate

Chapter.  13544 words.  Illustrated.

Subjects: International Economics

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