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Preventing Currency Crises in Emerging Markets$
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Sebastian Edwards and Jeffrey A. Frankel

Print publication date: 2002

Print ISBN-13: 9780226184944

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226185057.001.0001

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What Hurts Emerging Markets Most?

What Hurts Emerging Markets Most?

G3 Exchange Rate or Interest Rate Volatility?

Chapter:
(p.133) 3 What Hurts Emerging Markets Most?
Source:
Preventing Currency Crises in Emerging Markets
Author(s):
Carmen M. Reinhart, Vincent Raymond Reinhart
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226185057.003.0004

This chapter explores whether reducing Group of Three (G3) exchange rate volatility would decrease emerging markets' macroeconomic vulnerability. It specifically outlines the “traditional” North-South links via trade, commodity markets, and capital flows, and adds transmission channels in the form of interest rate and exchange rate volatilities. It is noted that trading higher for lower G3 exchange rate volatility, even at the cost of more volatility in either U.S. interest rates or consumption, would benefit growth. Moreover, advocates of G3 target zones have to determine another mechanism by which financial market volatility in the industrial countries hits their neighbors to the South beyond that expected through the flows of trade (with their associated effects on income) or capital. The data generally raises several important questions, implying that the welfare effects of attempts to stabilize the G3 on the emerging markets are ambiguous. Thus, resolving these ambiguities needs additional exploration.

Keywords:   Group of Three, exchange rate volatility, macroeconomic vulnerability, trade, commodity markets, capital flows, interest rate

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