Vol.22, No.S-1 / December 2004

Globalization, Macroeconomic Performance, and the Exchange Rates of Emerging Economies

Maurice Obstfeld

Among the developing countries of the world, those emerging markets that have sought some degree of integration into the global financial system are characterized by higher per capita incomes, higher long-run growth rates, and lower output and consumption volatility. These characteristics are more likely to be causes than effects of financial integration. The measurable gains from financial integration appear to be lower for emerging markets than for higher-income countries, and appear to have been limited by recent crises. One factor limiting the gains from financial integration is the difficulty emerging economies face in resolving the open-economy trilemma. Given their structural and institutional features, many emerging economies cannot live comfortably either with fixed or with freely floating exchange rates. Most recently, the exchange rates of several emerging countries display attempts at stabilization punctuated by high volatility in periods of market stress.

Key words: Developing countries; Emerging markets; Convergence; Macroeconomic volatility; Exchange rate regimes; Institutions; Dollarization; Original sin

Views expressed in Monetary and Economic Studies are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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