Macro-Financial Policymaking in Emerging Markets

• The international environment, the financial sector, and output outcomes
• External factors, international liquidity, and vulnerability to financial crises
• International shocks, monetary and exchange rate responses, and international reserve management
• Monetary policy responses to sudden stops in capital flows
• Managing international capital flows
• Global imbalances, external adjustment, and valuation effects
• New approaches to monetary economics
• Fiscal policy responses and debt sustainability analysis
• Banking crisis development and resolution
• Macroprudential regulation
• Country/regional perspectives on the US economy, China and Latin America and the Caribbean
• Crises and social protection

The course’s main modules are listed below. Guest lecturers will also address related trade and social sector challenges.

The global environment, initial macro-financial conditions, and output outcomes
Before the subprime crisis, the developing world benefited from extremely favorable external conditions (with some exceptions).  Many believed that the consequent bonanza was the result of the success of domestic policies.  Unfortunately, the recent financial crisis and the associated output slowdown have made it clear that external factors continue to play a key role in output outcomes in emerging markets.  But, more importantly, it made it clear that financial sector factors play a key role, making imperative a deep analysis of financial sector vulnerabilities. 

External factors, growth, international liquidity and vulnerability to financial crisis
Recent research suggests that a small set of external factors (US T-bond rates, high yield spreads, terms of trade and G-7 growth) account for a large share of Emerging Market (EM) GDP fluctuations.  How do shocks to external factors affect EM GDP growth? How does that impact on public sector accounts?  Considering debt maturity profiles and precarization of international financial market access conditions, what is the final effect of external factors and fiscal expenditure decisions on international liquidity and the chances of facing a financial crisis?

The key role of the financial sector and policy responses to sudden stop episodes
Based on country experiences, recent research suggests that high foreign-exchange-denominated debt and current account deficits have been major determinants of financial crisis and output performance in emerging economies during systemic sudden stops. What are the channels involved?  What indicators are available to gauge the soundness of the financial and public sectors?

Are current monetary regimes adapted to confront swift changes in the global financial environment?  Can emerging countries afford expansionary monetary and fiscal policies in times of crisis?  Could Chile’s success with counter-cyclical policy and Kazakhstan’s success with a stabilization fund be replicated? What are the constraints? How have recently developed, hard-to-trace financial instruments impacted global financial markets? Which policies can (or cannot) buffer the impact of such instruments?  Is more regulation the solution? Is there room for a strategic use of international reserves to buffer the impact of shocks?  How could international financial organizations help?

The recent experiences of Latin America with recoveries from systemic financial crises suggest that output collapses have been followed by credit-less recoveries to pre-crisis output levels in a relatively short span (the so-called phoenix miracles).  What are the implications of these findings for the design of the policy response?

Inflation, deflation, and exchange rate regimes
What have we learned from recent experiences of commodity price increases and inflation? The current global growth slowdown has raised concerns about price deflation. Is inflation targeting the right regime to manage deflation? Under what conditions?

Debt challenges
The developing world seems to have learned the debt lessons of the 1990s.  Low public debt and longer maturities have been significantly achieved in many emerging markets. But debt risks have not disappeared.  What are optimal debt management policies under changing conditions in international financing terms?  Today, private debt has become a source of fiscal risk for emerging markets since in several instances the government has acted as domestic lender of last resort.  What have been the channels of private sector indebtedness? What are the links between public debt and inflation expectations?

Quantitative Tools
Analytical discussions will be complemented by the following applications:

1. The impact of external factors on growth
2. A liquidity framework for the analysis of financial crisis vulnerability
3. Fiscal sustainability under Sudden Stops and under uncertainty
4. Banking stress tests

The Inter-American Development Bank will be offering tuition waivers for up to 15 policymakers from Latin American countries. Tuition waivers are available for applicants who are:

• A citizen of a Latin American or Caribbean country
• A public servant in one of the main financial institutions of his/her country, such as a Ministry of Finance, Department of Debt Management, Central Bank, or Ministry of Economic Development.
• Responsible for policy-making in his/her institution, particularly in contributing to the design and/or implementation of macroeconomic and financial policies, and/or in debt and macro-financial analysis.
• In a position to potentially incorporate the knowledge acquired during the course in the execution of his/her duties.
• Have a strong economics background.
• The applicant should have clearance from his/her institution regarding its willingness to finance his/her related travel and accommodation expenses.