Burns, AndrewKida, MizuhoLim, Jamus JeromeMohapatra, SanketStocker, Marc2014-04-102014-04-102014-04https://hdl.handle.net/10986/17711As the recovery in high-income countries firms amid a gradual withdrawal of extraordinary monetary stimulus, developing countries can expect stronger demand for their exports as global trade regains momentum, but also rising interest rates and potentially weaker capital inflows. This paper assesses the implications of a normalization of policy and activity in high-income countries for financial flows and crisis risks in developing countries. In the most likely scenario, a relatively orderly process of normalization would imply a slowdown in capital inflows amounting to 0.6 percent of developing-country GDP between 2013 and 2016, driven in particular by weaker portfolio investments. However, the risk of more abrupt adjustments remains significant, especially if increased market volatility accompanies the unwinding of unprecedented central bank interventions. According to simulations, abrupt changes in market expectations, resulting in global bond yields increasing by 100 to 200 basis points within a couple of quarters, could lead to a sharp reduction in capital inflows to developing countries by between 50 and 80 percent for several months. Evidence from past banking crises suggests that countries having seen a substantial expansion of domestic credit over the past five years, deteriorating current account balances, high levels of foreign and short-term debt, and over-valued exchange rates could be more at risk in current circumstances. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms and countercyclical macroeconomic and prudential policies to deal with a retrenchment of foreign capital. In other cases, where the scope for maneuver is more limited, countries may be forced to tighten fiscal and monetary policy to reduce financing needs and attract additional inflows.en-USCC BY 3.0 IGOACCOUNTINGAGRICULTURAL COMMODITYASSET PRICEASSET PRICESBALANCE OF PAYMENTBALANCE OF PAYMENTSBALANCE SHEETBANK BALANCE SHEETSBANK LENDINGBANK LOANSBANKING CRISESBANKING CRISISBANKING SECTORBASIS POINTSBOND FLOWSBOND ISSUANCEBOND SPREADSBOND YIELDSBONDSBUSINESS CYCLESCAPITAL ACCOUNTCAPITAL ACCOUNTSCAPITAL FLOWCAPITAL FLOWSCAPITAL INFLOWCAPITAL INFLOWSCAPITAL OUTFLOWCAPITAL OUTFLOWSCENTRAL BANKCENTRAL BANKSCOMMODITY PRICESCREDIT EXPANSIONCREDIT EXPANSIONSCREDIT GROWTHCREDIT QUALITYCREDIT RATINGSCREDIT RISKCREDIT RISKSCREDITORSCRISIS COUNTRIESCURRENCY CRISESCURRENCY CRISISCURRENCY DEPRECIATIONCURRENCY DEPRECIATIONSCURRENCY MISMATCHCURRENT ACCOUNT DEFICITSDEBT CRISESDEBT CRISISDEBT RATIODEBT RATIOSDEVELOPING COUNTRIESDEVELOPING COUNTRYDOMESTIC BONDDOMESTIC CREDITDOMESTIC CURRENCIESDOMESTIC FINANCIAL MARKETSDUMMY VARIABLEDUMMY VARIABLESEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET BONDEMERGING MARKET ECONOMIESEMERGING MARKETSEQUITY FLOWSEQUITY ISSUANCEEQUITY ISSUANCESEQUITY MARKETSEXCHANGE RATEEXCHANGE RATE MOVEMENTSEXCHANGE RATESEXTERNAL DEBTFEDERAL RESERVEFEDERAL RESERVE BANKFEDERAL RESERVE SYSTEMFINANCIAL ASSETSFINANCIAL CONTAGIONFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEVELOPMENTSFINANCIAL EXPOSUREFINANCIAL FLOWSFINANCIAL MARKETFINANCIAL MARKETSFINANCIAL RISKFINANCIAL SHOCKSFINANCIAL STABILITYFINANCIAL STRESSFINANCIAL SYSTEMFISCAL POLICIESFIXED INCOMEFIXED INCOME PORTFOLIOSFLEXIBLE EXCHANGE RATEFLOATING EXCHANGE RATESFOREIGN CAPITALFOREIGN CURRENCIESFOREIGN CURRENCYFOREIGN DIRECT INVESTMENTFOREIGN DIRECT INVESTMENTSFOREIGN EXCHANGEFOREIGN EXCHANGE MARKETSFOREIGN EXCHANGE RESERVESFOREIGN INVESTORSGLOBAL BONDGLOBAL CAPITALGLOBAL ECONOMYGLOBAL FINANCIAL STABILITYGLOBAL MARKETGLOBAL TRADEGLOBALIZATIONGOVERNMENT BONDGOVERNMENT BOND YIELDSGOVERNMENT BONDSGOVERNMENT FINANCINGINDEBTEDNESSINFLATIONINFLATIONARY PRESSURESINSTITUTIONAL INVESTORINSTITUTIONAL INVESTORSINTEREST RATEINTEREST RATE CHANGESINTEREST RATE DIFFERENTIALINTEREST RATE DIFFERENTIALSINTEREST RATESINTERNATIONAL BANKINTERNATIONAL BANK LENDINGINTERNATIONAL CAPITALINTERNATIONAL ECONOMICSINTERNATIONAL FINANCEINTERNATIONAL FINANCIAL INSTITUTIONSINTERNATIONAL SETTLEMENTSINVESTMENT CLIMATEINVESTMENT RATESINVESTOR CONFIDENCEISSUANCESLABOR MARKETSLENDING PORTFOLIOLEVEL OF DEBTLIQUIDITYLIQUIDITY RISKSLOANLOAN QUALITYLONG-TERM DEBTLONG-TERM INTERESTLONG-TERM INTEREST RATELONG-TERM INTEREST RATESMACROECONOMIC POLICIESMACROECONOMIC POLICYMACROECONOMIC STABILIZATIONMARKET ACCESSMARKET CONDITIONSMARKET CONFIDENCEMARKET MECHANISMSMARKET RISKSMONETARY AUTHORITIESMONETARY FUNDMONETARY POLICIESMONETARY POLICYMONEY SUPPLYMORTGAGEMORTGAGE-BACKED SECURITIESMUTUAL FUNDMUTUAL FUNDSNONPERFORMING LOANSOPEN ECONOMIESOUTSTANDING CREDITPENSIONPOLICY RESPONSEPOLITICAL ECONOMYPORTFOLIOPORTFOLIO FLOWSPORTFOLIO INFLOWSPORTFOLIO INVESTMENTPORTFOLIO INVESTMENTSPOST-CRISIS PERIODPOST-CRISIS PERIODSPRIVATE CAPITALPRIVATE CAPITAL INFLOWPRIVATE CAPITAL INFLOWSPRIVATE CREDITPUSH FACTORSRATE OF RETURNREAL EXCHANGE RATEREAL INTERESTREAL INTEREST RATEREPAYMENTRESERVESRETURNRISK ASSESSMENTSRISK AVERSIONRISK FACTORSSECONDARY MARKETSSHORT TERM DEBTSHORT-TERM DEBTSHORT-TERM EXTERNAL DEBTSHORT-TERM INTEREST RATESHORT-TERM INTEREST RATESSOLVENCYSOVEREIGN DEBTSTOCK MARKETSTOCK MARKET VOLATILITYSWAPSWAPSTOTAL DEBTTRADINGTRANSACTIONTREASURYTREASURY BILLSWITHDRAWALWORLD MARKET INTEGRATIONYIELD CURVE10.1596/1813-9450-6830