Sudden Stop in Emerging Markets
“I can’t stand up for falling down”
—Elvis Costello
Emerging markets don’t emerge. I always tell this to my students. The emerging markets of today are the same countries that I studied when I was in school.
There are many reasons for this1 statement but I will narrow it to one main, albeit highly complex, driver: using short-term foreign currency revenues to finance local investments in domestic currency. Cyclicality of commodity revenues and dependence on export growth generate periods of exuberance where politicians and policymakers ignore the risks of the cycle, entering large periods of excessive investment with questionable economic return only to face an abrupt loss of foreign currency revenues ...
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