The Decoupling Debate And Its Consequences

- "If decoupling just means a bigger growth differential between emerging and advanced economies, then decoupling is becoming more and more apparent: we expect Emerging Markets to generate 2.3 ppts of the world’s 3.7% GDP growth rate this year, and a bigger share next year."
- "More EM growth is coming from domestic spending, and this should reinforce concerns about inflationary risks. Although some EM inflationary pressures can be absorbed by rising imports, we think that some dangers may lurk here, partly because of the consequences of the 2010 global food price shock."
- "A number of EM central banks should be hiking rates over the next several months, but resistance to rate hikes among a number of EM central banks appears to be growing. One crucial reason for this is likely the fear of higher levels of unwelcome capital inflows."
- "So the dilemma is this: either you keep rates too low and raise the risk of asset bubbles; or you hike rates and suck in yield-seeking capital inflows. Either way, emerging currencies seem bound to strengthen over time, in spite of more aggressive fx intervention by many EM central banks in the short run. One consequence of this is likely to be more experimentation with controls on capital inflows."


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