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Emerging Markets’ Bubble Troubles

Emerging economies have been pursuing policies with little regard for the lessons of recent financial crises. Countries like India, Brazil, South Africa, and Indonesia have been hit by the Fed’s gradual exit from quantitative easing – and the asset bubbles that it has fueled.

ROME – Some of the developing world’s larger countries, flush with capital after being recognized by investors as “emerging-market economies” (EMEs), have been pursuing policies with little regard for the lessons of the financial crises of 1997-1998 and 2008-2009. As a result, countries like India, Brazil, South Africa, and Indonesia have been hit by the US Federal Reserve’s gradual exit from so-called quantitative easing (QE) – not just capital-flow reversals, but also a sharp decline in domestic asset prices.

Various developments last year raised expectations that the Fed would begin to taper its $85 billion-per-month open-ended bond-buying program sooner rather than later. This drove up US government-bond yields, and reduced the appeal of higher-yielding EME currencies. As a result, several EME currencies, from the Indian rupee to the Turkish lira, declined sharply.

Moreover, some EMEs have experienced financial-market disruptions and slowing economic growth. Such developments often lead to perverse economic behavior, as rumors and pessimistic predictions become self-fulfilling.

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