The emerging markets have led the global market slide in 2014, but those markets were in trouble in 2013 when the U.S. and Europe were doing fine. The media like to simplify things, so most headlines indicate that the Fed is causing the problems in the emerging markets. Not so fast, says this article. While U.S. monetary policy is a factor, it is far from the whole story. Kristin Forbes lays out three other factors and shows why and how they are affecting emerging markets. She also says you can expect more volatility in emerging markets and capital flows to emerging economies.
What variables other than US interest rates could have been the primary drivers of capital flows to emerging markets over this period? Figures 3 and 4 also graph capital flows to emerging markets, but now compare this to global growth and global risk/uncertainty (as measured by the VIX) respectively. Over the last decade, changes in both measures correspond to movements in capital flows, as expected. In the mid-2000s, as global growth increased and uncertainty fell, capital flows to emerging markets surged. During the Global Financial Crisis, as global growth collapsed and uncertainty spiked, capital flows collapsed. In 2010–2011, as global growth partially recovered and uncertainty fell, capital flows increased again. Correlation coefficients support this story. The correlation over this period of capital flows to emerging markets with global growth was 39%, and the correlation with uncertainty was -55%. Not only do these correlations have the expected sign, but they are significantly larger than the corresponding correlation of capital flows and US interest rates.