The Fed’s normalization of interest rate demonstrated that its impact on the global economy and financial markets indeed has been large, giving rise to significant capital outflows from EMEs, large adjustments and volatility in exchange rates as well as widened EM spreads and interest rates. The adverse effects of the Fed’s interest rate normalization has been on average larger than those occurred in previous two financial turmoil episodes namely the Eurozone sovereign debt crisis and the US tapering tantrum. Moreover, the disparity between the effected countries has been large too. The plummeted commodity prices as well as other factors led to this outcome as commodity importers suffered from both the lower commodity revenues and the tightening global financial conditions. Financial markets also differentiated EMEs by policy frameworks and prudent policies. Those having rich and better policy frameworks and prudent policies have withstood the recent global financial turmoil better than others. Commodity-exporting and commodity-importing EMEs have different monetary policy options. While commodity exporters have limited monetary policy space, commodity importers have some rooms to counteract. In the former group, inflations increased and balance sheets weakened due to the currency depreciation. In the latter group, in some countries, inflations decreased and central banks cut policy rates thanks to the low oil prices. However, in several oil importing countries, inflation is near or above the target bands. For central banks in these countries, tightening the monetary policy may be a priority for the credibility of central bank.

After evaluating the key stock balances, I now move to flows balances to uncover the dynamics governing stock balances in the economy. They include economic growth, inflation and current account balance. The left window of Figure 7 shows that the average GDP growth rates of EMEs are still above that of AEs and EMEs still contribute to global growth significantly despite the latest synchronous and protracted slowdown in emerging markets. The right window of Figure 7 reveals that the probably biggest post-crises’ success of EMEs is in the area of price stability. Prudent macroeconomic and financial policies and improved macroeconomic policy frameworks are the key factors behind this much lower inflation outcome. Among them the granting of independence to many EM central banks has been the most significant progress in improving the institutional quality of EM institutions. Their successes in lowering inflation over the years have resulted in desirable gains in monetary policy credibility. The adoption of inflation targeting frameworks provided beneficial nominal anchors and further enhanced policy credibility. To the extent that prudent policies and frameworks succeeded in achieving their targets the key dominances, especially in fiscal area, have eased and thereby the effectiveness of monetary policy increased significantly. One of the chief causes of the GFC is the existence of global external imbalances. The G20 led policy coordination has reduced the imbalances to a certain degree. In this process, some EMEs suffered from declines in their surplus levels but the others succeeded improvements. How resilient are EMEs to global financial conditions?