A Bumpy Ride for Emerging Markets

In recent months, the environment for capital flows to emerging economies has deteriorated sharply. But that does not mean that we are witnessing the collapse of yet another economic bubble, as many analysts are claiming.

BERKELEY – Emerging markets have been the darlings of global investors for most of the last decade. Even staid pension funds and sovereign wealth funds have increased their allocations to emerging-market assets.

Recently, however, the environment for capital flows to emerging economies has deteriorated sharply. Slowing growth and policy missteps, together with signs that the US Federal Reserve will start tightening monetary policy by scaling back its “quantitative easing” (QE, or open-ended purchases of long-term assets), have triggered deep sell-offs in emerging economies’ currency, bond, and equity markets.

What went wrong? Are we witnessing the collapse of yet another economic bubble, as many analysts are claiming?

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