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Jochem, Axel
Reitz, Stefan
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FinMaP-Policy Letter 1
[Conclusion] It is being increasingly held in the literature that, in a globalizing world, flexible exchange rates are no longer enough to insulate an economy against external shocks. Our empirical results corroborate the observation that, in the past few years, global factors have had a crucial impact on domestic financial market prices and that it is becoming increasingly difficult for EMEs to find shelter. Global liquidity, in particular, has been the dominant element of the evolution of financial markets in the emerging economies. What this means with respect to possible policy recommendations to EMEs on how they can best protect themselves from the adverse impact of volatile international capital flows is that neither flexible nor fixed exchange rates are capable of sheltering domestic financial markets from foreign shocks and of stabilizing the valuation of domestic financial instruments. What appear more promising are efforts to exploit the advantages of financial integration while at the same time taking precautions to ensure that external shocks can be absorbed by a sound financial sector with high standards of safety. In this connection, too, a stable macroeconomic environment can also help prevent temporary disruptions from becoming a full-blown hazard to macroeconomic stability.
Document Type: 
Research Report

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