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Lecture notes emerging markets (IF3201)
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Lectures notes on the Emerging Market module at Cass Business School. Achieved a 76% by studying from them.
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giovedì 28 gennaio 2021Emerging Markets
Lecture 1
- Characteristic of emerging markets
• Countries with lower level of income than AEs
• undeveloped and non-transparent economic and nancial institutions (World
Federation of Exchanges gives more information about Stock exchanges)
• Countries do not have adequate rule of Law and lack clearly de ned property
rights
• Countries, which have not liberalized their domestic nancial and external
sectors
- EMs is a diverse group with di erent assets risks and opportunities
- Group of countries that seem to share attributes:
• BRICS (Brazil, Russia, India, China)
• MINT (Mexico, Indonesia, Nigeria, Turkey)
• CIVETS(Colombia, Indonesia, Vietnam, Egypt, South Africa)
• TICK (Taiwan, India, China, Korea)
- Those groups are not static but change due to economic cycle
- The main drivers of fortune of emerging markets economic cycle are
• Global liquidity (driven by the US)
• Commodities demand (driven by China)
- Emerging markets contribution to the world GDP has been drastically
increasing during the past years
Financial intermediation: a decrease in transaction costs of capital accumulation and
encourage savings
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, giovedì 28 gennaio 2021
Lecture 2
How financial repression affect private loans and economic growth in
emerging markets
• Characteristics of financial repression
– Interest rate ceilings on bank deposits
– High bank reserve requirements
– Government credit and government direction of bank credit
– Government ownership and management of banks: direct debts
– Restrictions on foreign and domestic bank entry: such as Iran
– Restrictions on international capital flows
– High and variable inflation
– Taxation
• How does financial repression affect the allocation of loanable funds?
Interest rate ceilings on bank deposits
• In equilibrium: RE, (L/P)E
• In reality there are operating costs: (RL-RD), (L/P)1
• Imposition of ceiling implies a reduction of real loans available in the
private market from Rp, (L/P)1 to RDC, (L/P)C
• Credit is allocated not according to expected productivity of the investment
projects; but according to transaction costs and perceived risks of default.
– low interest rates produce a bias in favor of current consumption and will
reduce savings
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, giovedì 28 gennaio 2021
High bank reserve requirements with zero interest
• Assume inflation is equal to zero:
• The bank will pay interest rate even on reserve requirement
therefore:
• The interest rate spread will be higher as:
• The bank will have to pay interest on the full amount so the
depositors will receive lower interest rate than borrowers
• As a consequence borrowers will have higher interest rate on their
loans
• In the graph borrowers are penalized and depositors have an
advantage
• Assuming no other operating costs the supply of real loans shifts
to the left and the spread becomes
(RL2-RD2) to accommodate the costs to the banks of q(D/P)RL2,
where
q: reserve requirement
D/P: real deposits
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, giovedì 28 gennaio 2021
• Assume that inflation is not zero. Banks will bear inflation tax since they
hold cash with the Central Bank, which does not compensate them for the
inflation
• Government credit and government direction of bank credit; supply of
loans further shifts to the left, to (L/P)S4
• Government ownership and management of banks
– It is doubtful whether it leads to better allocation of resources because of
the greater interference by the government in allocating credit; directing
support to inefficient state-owned enterprises
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