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How the Flows Change When Interest Rates Are Normalized: Risk to Economic and Financial Stability

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Fault Lines After COVID-19

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Abstract

Central banks in major economies are increasing interest rates, to combat inflation, after a long period of accommodative monetary policy. During the prolonged period of low interest rates external liabilities of a number of economies have increased fast. This build-up of systemic risk threatens now to materialize as debt service costs increase and refinancing of external debt is becoming prohibitively expensive. This chapter brings together the lessons learned from multiple financial crisis that followed the steep increase in major economies’ policy rates in early 1980s and recent literature on risks emanating from extreme capital flows. Financial indicators, mostly focusing on liability flows, point to high current external imbalances and systemic risk in many emerging and developing economies.

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Notes

  1. 1.

    Their sample includes 97% of global financial inflows during the GFC.

  2. 2.

    World bank IDS data set and authors calculations.

  3. 3.

    Reuters January 11, 2021, “Angola gets breathing space from Chinese creditors, says finance minister.”

  4. 4.

    VOA news October 19, 2022. “Kenya Wants to Renegotiate Loans for Chinese-Built Railway.”

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Author information

Authors and Affiliations

  1. Yale University, New Haven, CT, USA

    Sigridur Benediktsdottir

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  1. Sigridur Benediktsdottir
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Correspondence to Sigridur Benediktsdottir .

Editor information

Editors and Affiliations

  1. Booth School of Business, University of Chicago, Evanston, IL, USA

    Robert Z. Aliber

  2. Institute of International Affairs, University of Iceland, ReykjavĂ­k, Iceland

    Már Gudmundsson

  3. Department of Economics, University of Iceland, Reykjavik, Iceland

    Gylfi Zoega

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Benediktsdottir, S. (2023). How the Flows Change When Interest Rates Are Normalized: Risk to Economic and Financial Stability. In: Aliber, R.Z., Gudmundsson, M., Zoega, G. (eds) Fault Lines After COVID-19. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-26482-5_13

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  • DOI: https://doi.org/10.1007/978-3-031-26482-5_13

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-031-26481-8

  • Online ISBN: 978-3-031-26482-5

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

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