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

Emerging Market response to Developed Countries over recent periods of US recessions and crises: What changed?. Regan Deonanan University of Notre Dame Thursday, 23 rd June, 2011. Why 2007 US crisis of particular concern to Macroeconomists?. Three large facts:

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

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  1. Emerging Market response to Developed Countries over recent periods of US recessions and crises: What changed? Regan DeonananUniversity of Notre Dame Thursday, 23rd June, 2011

  2. 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

  3. 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

  4. 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

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

  6. Main point from graph • EM growth became highly synchronized with DC growth/shocks in moving from 2001 to 2007 period – why?

  7. 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

  8. 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

  9. Results: Size shocks or structural change?

  10. 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 

  11. 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

  12. 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

  13. 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

  14. 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

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