Regan Deonanan by R0dxt80

VIEWS: 8 PAGES: 14

									Emerging Market response to Developed
  Countries over recent periods of US
 recessions and crises: What changed?



                                 Regan Deonanan
                          University of Notre Dame
                         Thursday, 23rd June, 2011




                                                     1
Why 2007 US crisis of particular concern to Macroeconomists?




 Three large facts:
    Global nature of this US ‘recession’
    Largest downturn since Great Depression
    Macroeconomic models did not predict it




 Implication:
       Contrary to previous belief, we still don’t know how to prevent them




                                                                               2
Purpose of my research




 How do we prevent developing countries from being so affected by
   global crises?



 Need to understand what’s different about the 2007 crisis and why




                                                                      3
Definitions




 Emerging markets (EMs) – countries in the process of rapid growth
       Examples: BRIC, Indonesia, Mexico, Poland



 Developed countries (DCs) – countries with high level of development
       Examples: Canada, France, Germany, Italy, Japan, UK, US (G7)



 US recessions/crisis: 1981, 1990, 2001, 2007




                                                                         4
Big picture from the data:
Pair-wise correlations of rgdp growth between EMs and DCs




                                                            5
Main point from graph




 EM growth became highly synchronized with DC growth/shocks in
   moving from 2001 to 2007 period – why?




                                                                  6
Framework of empirical methodology




   Assumptions:
        DC fluctuations are the most important drivers of EM growth rates
        EMs do not influence DC behavior



   EM growth = US shock + Other DC shock + Prior EM growth + EM shocks




                                                                             7
Intuition behind empirical methodology




 What’s driving this recent change in EM response?
    Size of shocks from DCs
    Structural change within EM economy




 What is the nature of the structural change?
    Trade related
    Financially related




                                                      8
Results: Size shocks or structural change?


                                       Bra                                                                  Chi                                                          Col
      4




                                                                                                                                                6
                                                                                    3
      2




                                                                                                                                                4
                                                                                    2
      0




                                                                                                                                                2
                                                                                    1
     -2




                                                                                    0




                                                                                                                                                0
     -4




                                                                               -1




                                                                                                                                            -2
          2005q3              2006q3     2007q3       2008q3          2009q3
                                       time
                                                                                         2005q3    2006q3      2007q3    2008q3    2009q3            2005q3    2006q3      2007q3     2008q3     2009q3
                   BRA_Orig              BRA_Shock             BRA_Effect
                                                                                                             time                                                        time




                                       Mex                                                                  Mor                                                         Per
      4




                                                                                                                                            4
                                                                                4
      2




                                                                                                                                            2
                                                                                2
      0
     -2




                                                                                                                                            0
                                                                                0
     -4




                                                                                                                                           -2
     -6




                                                                               -2




          2005q3          2006q3        2007q3       2008q3        2009q3               2005q3    2006q3     2007q3     2008q3    2009q3            2005q3    2006q3     2007q3     2008q3     2009q3
                                       time                                                                 time                                                        time




                                                                                                                                                                                                          9
Results: Ranking by level of structural change


   1. LATVIA
   2. LITHUANIA
   3. ESTONIA
   4. RUSSIA
   5. SLOVAKIA
   6. ROMANIA
   7. MALAYSIA
   8. KOREA
   9. MEXICO
   10. ARGENTINA
   11. THAILAND
   12. PERU
   13. TURKEY
   14. JORDAN
   15. CZECHOSLOVAKIA
   16. BRAZIL
   17. CHILE
   18. HUNDURAS
   19. POLAND
   20. SOUTH AFRICA
   21. MOROCCO
   22. COLUMBIA
   23. INDONESIA
   24. ISRAEL


                                                 10
Overall results



 Structural change within EM economies played a greater role in
   explaining the change in behavior observed


 This structural change was particularly oriented towards the US



 This structural change left EMs more vulnerable to the US through
   trade and not through financial channels




                                                                      11
Takeaway: EM response to DCs over various US
recessions/crises– what changed?



      Whenever the US economy goes down we can expect EM economies to
       also go down at the same time




                                                                         12
Implications


 Important from portfolio diversification viewpoint
    If investing in EMs for high growth - fine
    If motive for investing in EMs is balancing risk from investments in DCs,
     need to look to other countries



 Important from macroeconomic stabilization viewpoint
    As we seek to diversify our economies by going after EMs, need to ensure
     we develop relationships with other developing countries as a means of
     insuring away aggregate risk




                                                                                 13
Diversification and opportunities for growth of region




 International investors will now be looking beyond EMs for investment
   opportunities

 Natural progression will be to Frontier Markets, some of which can be
   found here in our region (eg. Jamaica, T&T)

 Making Caribbean region for financially attractive has the potential,
   more than ever before, to bring in much needed investment




                                                                          14

								
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