Emerging Markets Economics

Emerging Markets Economics Update

6 June, 2018

Fed balance sheet confusion rears its head again

Fears that a reduction in the size of the Fed’s balance sheet will somehow reduce the amount of dollars available to EMs to finance their external liabilities is grounded in a fundamental misconception about how monetary economics works. A rise in US interest rates, by contrast, will cause problems for the handful of EMs with large external financing needs, but for most the macro effect of higher US interest rates will be limited.

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