Capital Flows During the Pandemic: Lessons for a More Resilient International Financial Architecture

56 Pages Posted: 14 Apr 2021

Multiple version iconThere are 2 versions of this paper

Date Written: December 23, 2020

Abstract

This paper studies the sudden stop in capital flows that emerging markets experienced throughout the first months of the pandemic. First, we find that the sudden stop in capital flows was strongly affected by lower portfolio investments by non-bank financial intermediaries: for many emerging markets, the magnitude of the sudden stop exceeded that of the Global Financial Crisis. Second, we show that emerging markets adopted expansionary fiscal and monetary policies to deal with the sudden stop and the resultant recession; moreover, the use of macroprudential measures and unconventional monetary policy are part of a wider policy toolkit, compared with other crises. Third, we estimate the adequacy of current IMF resources if emerging markets were hit by a systemic sudden stop. We find that the IMF’s resources are adequate in the event of a moderate sudden stop; in the event of a more severe scenario, the financing needs of emerging markets could go beyond the IMF’s lending capacity, even after the other layers of the global financial safety net have been deployed.

Keywords: International Finance, International Financial Data, Foreign Exchange Reserves, Capital Flow, IMF

JEL Classification: F31, F32, F33

Suggested Citation

Eguren Martin, Fernando and Joy, Mark and Maurini, Claudia and Nispi Landi, Valerio and Schiavone, Alessandro and van Hombeeck, Carlos Eduardo and Moro, Alessandro, Capital Flows During the Pandemic: Lessons for a More Resilient International Financial Architecture (December 23, 2020). Bank of Italy Occasional Paper No. 589, Available at SSRN: https://ssrn.com/abstract=3826497 or http://dx.doi.org/10.2139/ssrn.3826497

Fernando Eguren Martin

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mark Joy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Claudia Maurini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Valerio Nispi Landi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Schiavone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Carlos Eduardo Van Hombeeck

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Alessandro Moro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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