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Mr. Julian T Chow, Ms. Florence Jaumotte, Mr. Seok G Park, and Ms. Yuanyan S Zhang
The recent strong, sustained appreciation of the U.S. dollar raises questions about possible financial spillover effects for emerging markets and developing countries. This report finds that, unlike past episodes, emerging markets’ vulnerability has improved along a number of dimensions, though some risks persist (as identified in this report).
Mr. Julian T Chow, Ms. Florence Jaumotte, Mr. Seok G Park, and Ms. Yuanyan S Zhang

Investment Position in Emerging Markets and Low-Income Countries Sources: External Wealth of Nations database; Lane and Shambaugh (2010) ; World Bank Quarterly External Debt Statistics; and IMF staff calculations. Note: FX = foreign currency; FDI = foreign direct investment; IIP = international investment position. FX debt liabilities are adjusted for the share of domestic currency in gross external debt, whenever available. 1 Defined as FX debt assets + FX reserves - FX debt liabilities. 2 Weights are based on GDP in U.S. dollars. As a result, many EMs

International Monetary Fund

debt instruments, a sharp improvement from the mid-1990s ( Figure 6 , panel 4). One key indicator to assess vulnerability to external crisis is the net FX debt asset position, defined as the sum of FX debt assets and FX reserves, minus FX debt liabilities. About half of EMs are now long FX, and another quarter have a short FX debt position lower than 20 percent of GDP. Systemic EMs (with the exception of Turkey) have also considerably improved their net FX debt asset position. Most of them have become long FX, and fuel exporters and some EMs in Emerging Asia have

International Monetary Fund
Many countries around the globe, particularly the systemic advanced economies, face the challenge of closing output gaps and raising potential output growth. Addressing these challenges requires a package of macroeconomic, financial and structural policies that will boost both aggregate demand and aggregate supply, while closing the shortfall between demand and supply. Each element of this package is important and one cannot substitute for the other: easy monetary policy will not raise potential output just as structural reforms will not close the output gap. This report studies the impact on emerging markets and nonsystemic advanced economies from monetary policy actions in systemic advanced economies, with a look also at knock-on effects from the decline in world oil prices.
Mr. Luis M. Cubeddu, Mrs. Swarnali A Hannan, and Mr. Pau Rabanal
Building on the vast literature, this paper focuses on the role of the structure of the international investment position (IIP) in affecting countries’ external vulnerabilities. Using a sample of 73 advanced and emerging economies and new database on the IIP’s currency composition, we find that the size and structure of external liabilities and assets, especially with regards to currency denomination, matter in understanding balance-of-payments pressures. Specifically, and beyond the standard macroeconomic factors highlighted in other studies, higher levels of gross external debt increase the likelihood of an external crisis, while higher levels of foreign-currency-denominated external debt increase the likelihood of sudden stops. Foreign reserve assets play a mitigating role, although with diminishing returns, and the combination of flow and stock imbalances amplifies external risks, especially during periods of heightened global risk aversion. The results are especially strong for emerging economies, where the impact of flow and stock imbalances and foreign currency mismatches are larger and more robust across specifications.
International Monetary Fund. Western Hemisphere Dept.

minimal, given that short-term FX bank deposits are significantly larger than short-term FX liabilities ( Table 1 ). 16 Costa Rica. Maturity Breakdown of FX debt liabilities (Percent of GDP, 2013) Sources: Central Bank of Guatemala and Fund staff estimates. The Impact of 2014 Depreciation on The Net Foreign Exchange Debt Position of the Financial Sector and the Private Sector (Percent of GDP) 1/ Private sector net FX position with financial sector includes FX bank credit and deposits of non-financial corporations and households. Private sector

Mr. Balazs Csonto and Tryggvi Gudmundsson
Emerging markets (EMs) often respond to shocks by intervening in foreign exchange (FX) markets and thus preventing full exchange rate adjustment. This response can serve to dampen the effect of shocks and increase monetary policy space but may also incentivize economic participants to increase risk taking and take on more FX debt. This paper empirically analyzes the role of exchange rate flexibility in affecting such risk taking, by using rolling correlations and difference-in-difference estimations. The results suggest that a shift towards greater exchange rate flexibility often coincides with a decline in external FX debt. The findings also highlight the importance of using complementary policies to deal with financial stability issues related to the exchange rate, such as FX-specific macroprudential policies and policies aimed at promoting financial development.
Mr. Balazs Csonto and Tryggvi Gudmundsson

. Similarly, IMF (2020) find that FX debt liabilities increase the likelihood of an external crisis, especially in EMs and developing economies. Moreover, they also show that pre-existing elevated FX debt levels amplify the macroeconomic costs of an external crisis. While a lot of the literature focuses on the extent to which significant levels of FX debt raise the probability of a crisis and its potential costs, FX debt can also weigh on activity in a non-crisis environment. This is the case when financial conditions become determined to a greater extent by exchange

International Monetary Fund

overview of current account imbalances and exchange rate misalignment. 28 Chapter 2 of the External Sector Report ( IMF, 2020b ) confirms that FX debt liabilities are associated with a higher incidence of external crises in EMDEs. Box 2.1 shows that the risks for EMDEs arise especially from rollover risk, in particular from interbank debt and scheduled amortization (i.e. short-term debt plus maturing long-term debt). 29 Di Giovanni et al. (2018) and Kalemli-Ozcan (2019) show that firms borrow in FX both from domestic banks and directly from international

International Monetary Fund
Policymakers often face difficult tradeoffs in pursuing domestic and external stabilization objectives. The paper reflects staff’s work to advance the understanding of the policy options and tradeoffs available to policymakers in a systematic and analytical way. The paper recognizes that the optimal path of the IPF tools depends on structural characteristics and fiscal policies. The operational implications of IPF findings require careful consideration. Developing safeguards to minimize the risk of inappropriate use of IPF policies will be essential. Staff remains guided by the Fund’s Institutional View (IV) on the Liberalization and Management of Capital Flows.