Complexities of Financial Globalisation

Analytical and Policy Issues in Emerging and Developing Economies

Tony Cavoli, Sasidaran Gopalan, Ramkishen S. Rajan

• Publisher: Routledge
• Year: 2020
• Print ISBN:
  9780367421748
• eBook ISBN:
  9781000067477
• Topic: Business
• Subtopic: Finance
• Index: Business

Since the 1990s, several emerging market and developing economies (EMDEs) have, to varying degrees, embraced the process of financial globalisation, broadly defined as a set of policies that involve allowing for greater openness to cross-border capital flows as well as greater market access to foreign financial institutions. This book provides a systematic empirical analysis on the complex interactions between financial sector development, macroeconomic and financial stability in EMDEs in general and those in the Asian region in particular.

The book consists of three sections pertaining to monetary and exchange rate policies under financial globalisation; financial inclusion and macroeconomic policies in the context of financial liberalisation; and finally, the dynamics of foreign direct investment flows and their real impacts in EMDEs. Each of the chapters analyse important economic policy issues of contemporary relevance and is informed by data and rigorous empirical analysis.

The book will be appealing to anyone interested in exploring the implications of a key set of issues emanating from financial globalisation on EMDEs in a rigorous but readable manner.

Part I
Monetary and exchange rate policies

1 How have exchange rate policies evolved in an era of financial globalisation?¹

1.1 Introduction

Despite registering rapid growth rates over the last 15 years, several emerging market and developing economies (EMDEs) across the world still find themselves highly vulnerable to the cycle of sustained capital inflows and their sharp reversals. These ebbs and flows of capital have complicated macroeconomic policy management for all EMDEs regardless of whether they have adopted flexible or managed exchange rate regimes.

The well-known “impossible trinity” states that countries can only pursue two of three policy objectives completely – capital controls, fixed exchange rates or monetary policy autonomy. This implies that should policymakers opt not to restrain capital movements despite high and volatile capital flows, the policy choice becomes one where authorities have to decide between opting for exchange rate flexibility and monetary policy autonomy.

However, there are questions about whether monetary policy autonomy does in fact exist to any reasonable extent due to pervasive factors such as global liquidity and risk spillovers. Specifically, Rey (2013) proclaimed that in the era of financial globalisation a country with an open capital account would remain highly susceptible to the global financial cycle, independent of the exchange rate regime. She has highlighted the role of the VIX (the Chicago Board Options Exchange Market Volatility Index which is used as a measure of uncertainty and market risk aversion) and the US Fed funds rate in impacting global capital flows, bank leverage and asset prices which have a strong common component (i.e. they are highly correlated across countries). According to this thesis, the global financial cycle could explain how EMDEs have imported the ultra-loose monetary conditions in the US and were faced with a huge run-up in credit and asset prices regardless of the exchange rate regime. In other words, exchange rate flexibility has not offered much benefit by way of greater interest rate policy autonomy as suggested by received wisdom. Based on this line of reasoning, the global financial cycle has transformed the trilemma into a “dilemma” in the sense that the only way a peripheral country can hope to maintain independent interest rate policy is by compromising its capital account openness.²

This presents a possible incentive to manage exchange rates as, under th...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• List of contributors
• Preface
• Acknowledgements
• Part I Monetary and exchange rate policies
• Part II Financial inclusion and macroeconomic policies
• Part III Foreign direct investment flows and real impacts
• Subject Index