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Tony Du

Eichengreen and Mody’s discussion on the viability of microfinancing emphasizes the fallibility of economic models. The authors state that the relationship between capital flow between developing and industrialized markets and interest rates is not one of simple supply and demand. I believe it is important to examine microfinancing from multiple perspectives. Common wisdom dictates microfinancing as the primary means to jumpstarting or igniting emerging markets (and for smaller scale economic growth). However, the authors address the importance of looking at the drawbacks that can and have occurred. I am not saying that microfinancing is not the appropriate way to approach these issues, rather that we need to look at it in a more realistic light. This article reemphasizes the possible shortcomings of economic models, and the difficult transition from theory to reality and policy.

Tanpreet Hunjan

In ‘Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?’ Eichengreen and Mody come to the conclusion that capital flow to developing countries is not the single product of developed countries interest rates or a determinant of developed countries economic policy. Working in sales and trading on the Emerging rate and FX desk his summer US monetary policy had a lasting effect on developing country currencies. Several countries in which their currencies were being hedged and exchanged had their currency pegged to the dollar and would be exchanged solely through the U.S dollar like North Korea. This reliance on US interest rates therefore lead me to believe that US rates would be a large determinant of capital flows and accessibility in developing counties. It was interesting therefore to find that other factors affect capital accessibility and availability.

With this is mind many developed and advanced economies welcome a rise in the U.S interest rates but this rings trouble for many emerging markets not due to previous thoughts I had such as currency issues or altering balance of payments. On my internship I learnt that in most developing economies there’s a case of low external debt levels, more flexible exchange rates and FX reserves which handle such economic shocks. A rise in U.S rates gives some certainty that there are future rate hikes to come and that developing economies may benefit from this due to reduced short term volatility in currencies and their capital flows. However, a stronger dollar pays stress to those countries with great levels of corporate debt in dollars and escalate difficulty in countries such as Turkey and Russia who suffer from economic mishandling and political instability. Ultimately, everyone is watching day to day what the U.S does in regards to monetary and fiscal policy as the effects are felt worldwide, especially within developing economies and this paper challenged some of my previous thoughts on capital flows to developing counties.


I thought Eichengreen and Mody’s paper was really interesting. They determined that capital flows to developing countries are not only the product of a developed countries interest rate nor solely the policies and decisions of the underdeveloped country. In the end, Eichengreen and Mody concluded that both supply and demand responses have been important in their analysis, yet the balance between them has differed by region. They conclude that there is an interest rate effect but in order to see it one has to look at all the small nuances that cause it. This made me think about the paper we read earlier in the semester regarding China’s and South Korea’s unorthodox ways to spur development. China marginalized farm production and South Korea did not allow foreign investment and restricted savings to only domestic markets. These methods may seem unconventional at first but they did seem to work. This goes back to the traditional economic model. These models can provide us with a view of the world that for the most part can give us accurate insights. But reality is much more complex and what may work one place may not work somewhere else.

Jack Miller


After reading the piece on interest rates and capital flows, I immediately thought of how our president-elect Trump will influence these things going forward. It is interesting to speculate how other countries respond to this, but also how american investors try to predict how other countries will respond. If Trump's plans on free trade are followed through on, how will that affect international trade and/or loanable funds markets? It is very interesting to think about the next four years from an international economic perspective, not just from a social perspective in our own country.

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