The Centennial Resilience Index: Expanding Its Coverage and ...

THE CENTENNIAL RESILIENCE INDEX: EXPANDING ITS COVERAGE AND TESTING ITS PREDICTIVE POWERFigure3Net Capital inflows to Emerging Market Economies (% of GDP)Source: World Bank.as optimism waned, adding an extra challenge toEMCs’ policy makers.Net Capital Inflows to EMCsAfter a steady run-up in the period leading tothe global financial crisis, capital inflows in EMCshave caused serious disruptions as the deleveragingprocess in the advanced economies has led to significantcutbacks, only temporarily reversed in 2010(Figure 3). The steady worsening of the Europeansituation has induced another round of risk aversionand total flows are now lower than at the beginning ofthe observed period (2004).This adds up to a picture of lower and, asimportantly, highly volatile inflows, complicating theadoption of a cohesive policy response by EMCs.Policy adjustments have been able to accommodateinflows by accumulating international reserves, helpingalleviate excessive currency appreciation. Theyhave also helped manage potentially bubble-inducingincreases in liquidity. However, EMCs’ policy makershave found it difficult or cumbersome to manage theunwelcome sources of volatility associated with thesudden stops/inflows linked to the risk-on/risk-off behaviorsof the capital markets and to monetary policyinitiatives in the U.S. Asset prices and exchange rateswere strongly impacted by the volatility of inflows, asillustrated in the following charts.Volatility is the key word. As Figure 4 shows,starting in early 2009, a run-up in portfolio flows toEMCs was triggered by the steep decline in the levelof interest rates in advanced economies and theensuing quest for yield. By early 2011, net portfolioflows (equity and debt instruments) to EMCs hadmore than doubled compared to their level before theadvent of the crisis. In stark contrast, there has beena marked decline more recently, as shown in the followingfigure, as risk appetite and exposure to EMCs,in particular from European investors, plummeted.