Emerging Markets Flash Warning Signs, and Other Research to Read This Week

Here's a summary of important economic research released Aug. 16-22

The Two Big Questions Facing the Fed

Federal Reserve Chair Janet Yellen will speak at the Kansas City Fed's Jackson Hole symposium Friday morning, so it's an easy week to get economic tunnel vision.

If you're too short on time to read anything that doesn't relate to "Designing Resilient Monetary Policy Frameworks for the Future" — the conference's oh-so-sexy theme — we've got you covered. 

This week's research roundup, the latest installment of a new weekly column, starts with a look at vulnerabilities in emerging markets. From there, we go to euro area aging, the still-glum outlook for big-time fiscal spending, and the cost of Democratic presidential nominee Hillary Clinton's carbon emissions goal. If there's an unifying theme here, it's that central bankers aren't the only ones with troubles at hand — though if you read to the end you'll get an overview of their challenges too.

International Capital Flows and Vulnerabilities in EMEs: Analysis and Data Gaps

Authors:  Nikola Tarashev, Stefan Avdjiev and Ben Cohen

Available: Bank for International Settlements website, published Aug. 18

Indebted corporations in several emerging markets – including China and Brazil – could face trouble in the near future, which may send shocks reverberating through their national banking sectors, this BIS paper finds.

The accumulation of debt since the global financial crisis has left emerging-market economies especially vulnerable to capital outflows, according to the authors. 

Points of particular concern: Offshore borrowing by non-financial corporates has "grown at a fast clip" in some countries, helping to shape national financial conditions and increasing vulnerabilities. And because data on international capital flows are lacking, the scope of any weakness in emerging-market banking systems might be misunderstood.

The authors look at warning signals of financial overheating, and find heightened risk of financial distress in the medium-term in China, Brazil and Turkey in particular. 

The Euro Area Workforce is Aging, Costing Growth

Authors: Shekhar Aiyar, Christian Ebeke and Xiaobo Shao

Available: IMFdirect blog from the International Monetary Fund, published Aug. 17

Over the next two decades, the share of euro area workers who are 55 to 64 years old will rise by a third, according to the paper – more than in the U.S. or United Kingdom. "We find that workforce aging significantly reduces productivity," the authors write, holding that a 5 percentage-point increase in the older age group is associated with a 3 percent labor productivity decline. "Worryingly, some of the largest adverse effects on productivity will fall on countries that can least afford it, such as Greece, Spain, Portugal, and Italy."

Policies can help to ease the productivity effects of aging, the authors say. Improved health conditions could particularly help, along with worker training or re-training.

It’s important to note that the effects of population aging on productivity are controversial. For another take, check out this recent paper, which focuses instead on aging in the U.S. and suggests that the loss of productivity from aging may come partly from lost opportunities for older and younger workers to complement one another.  

Fiscal Drug for Addicted Markets

Author: Athanasios Vamvakidis

Available: to Bank of America Merrill Lynch clients, published Aug. 19

Vamvakidis, a foreign exchange strategist at Bank of America, has a warning: don’t get too excited about fiscal policy.

Markets long addicted to monetary stimulus have begun to look to fiscal policy for their next hit, but "we see limits to the extent to which advanced economies have room for substantial fiscal expansion," so markets could find themselves let down, he writes.

Basically, the argument is that major economies have historically high debt levels, especially Japan and, to a lesser extent, the U.S. and eurozone. The only countries that Vamvakidis and his colleagues see having much fiscal space – Australia, New Zealand, Norway, Sweden and Switzerland – are too small to have much effect on the global economy.

Despite that lack of room, Bank of America notes that more fiscal stimulus is in the pipeline in Japan, but they warn that markets may get too excited about the prospect of helicopter money. They also see a possibility of short-term stimulus in the U.K., but expect little chance of additional fiscal injections beyond what’s happening in the eurozone. 

What Would It Take to Reduce U.S. Greenhouse Gas Emissions 80% by 2050?

Author: Geoffrey Heal

Available: National Bureau of Economic Research website, included in Aug. 22 digest

The U.S. is trying to stay on track to reduce carbon emissions by 80 percent or more from 2005 levels by 2050, and Hillary Clinton has made that ambition a campaign goal. But how much would that achievement cost? 

The bill would total anywhere from $42 billion to $176 billion per year, according to Columbia Business School's Heal. "My conclusion is that the U.S. economy could reduce carbon emissions by 80% from 2005 levels within three decades," he writes, but it would take a $3.3 trillion to $7.3 trillion capital investment in new energy generation, transmission and storage capacity.  "I see decarbonizing electricity production as the key step in decarbonizing the whole economy," Heal writes, because that electricity could be extended to cars and heating – other carbon generators. 

The paper discusses various options for the mix of future energy sources and storage methods and alternatives, and the breakdown of the best and worst scenarios are above. "Whichever case we focus on, these are large numbers," Heal writes, noting that in 2015 U.S. capital expenditures on new electric generation was about $42 billion. "In the best case we are on track: in the worst, we are scaling up the U.S.’s level of expenditure on new generating capacity by a factor of about four."

Gauging the Ability of the FOMC to Respond to Future Recessions

Author: David Reifschneider

Available: Fed's website, published Aug. 19

We couldn't leave you without something Jackson Hole-relevant. Reifschneider is among Yellen's most-cited economists, and his new paper highlights that the Federal Reserve will be able to juice the economy using unconventional measures in the next recession, even if it has less room to cut rates. "Even in the event of a fairly severe recession, asset purchases and forward guidance should be able to compensate for the FOMC’s likely limited scope to cut short-term interest rates in the future." He does note that there are situations in which the Fed's capabilities could be strained.

 

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