How emerging economies bear the burden of the dollar hegemony

As the last instalment of this column observed, there is a rising drumbeat of debate over the unwinding of America’s unconventional monetary policy—in particular, large-scale asset purchases, often called quantitative easing —as well as the eventual normalization of its policy interest rate to above the near-zero level at which it has been stuck since the global financial crisis. Readers will recall the ‘taper tantrum’ crisis of 2013, which created panic in global financial markets—especially emerging economy stock, bond and currency markets—after Ben Bernanke, the Fed chief then, loosely remarked that the central bank was planning to begin dialling down its asset purchases without being very clear about his likely forward guidance on a glide path for policy normalization. Speaking on the possibility of Fed tapering in an interview to the Financial Times, the International Monetary Fund’s chief economist Gita Gopinath warned that emerging economies could not “afford" a repetition of the 2013 taper crisis. The danger scenario for emerging economies, especially heavily-indebted ones, would be the twin blows of rising debt service costs on their dollar-denominated debts as well as a likely outflow of a large quantum of capital funds enticed by higher returns to be earned in US dollars, to say nothing of the safe-haven value of the dollar in times of economic volatility.