Emerging Economies Prone To Shocks From Advanced Economies: IMF

The International Monetary Fund (IMF), in its The Global Financial Stability Report, has cautioned that “the risk of shocks emerging from advanced economies hitting emerging economies has doubled since the collapse of Lehman Brothers in 2008.”

The report states that the contribution of portfolio investments from advanced economies in the total debt and equity investments in emerging markets has increased to 12% in the last decade. This is due to the increase in financial market linkages through which financial shocks can get transferred rapidly.

This has also been flagged as a risk that could affect global financial stability as a chain reaction in case of geopolitical tensions or negative easy-liquidity monetary policy of the US.

Reserve Bank of India Governor and former IMF chief economist, Raghuram Rajan, had also cautioned against the vulnerability of the emerging market economies to the US Fed’s impending turnaround of its ‘Quantitative Easing’ policy. Through this policy, the US kept interest rates at almost zero to drive domestic demand. This had led to a flow of dollar investments into emerging markets like India.