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Sarah Hollen

I like that this paper gives sort of a new perspective on development. We have talked a lot about the conditions and institutions in developing countries that facilitate economic growth, so it was neat to consider how something like the interest rates in developed countries could have such a significant impact on the flow of financial capital to developing countries. I also found the approach of this paper—that it sought to reconcile earlier empirical findings with qualitative evidence, using new data and controlling for important confounding variables—to be beneficial. To be honest, I didn’t really understand all of this paper and all of the macroeconomic concepts, but because of the clarity of the writing I was still able to grasp the main findings and the significance of their implications. One question I have after reading this is about how (or if) the COVID-19 pandemic would be expected to impact the flow of financial capital from developed to developing countries. Because U.S. interest rates are so low, do/will we see more foreign investment and lending to emerging economies? Will credit quality fall? Or is this not the case because of the global nature of the coronavirus shock (or for some other reason)? Finally, are these trends something we can observe now, or will they only become evident in the future as we look back on this time period? Overall, I think that considering the application of these findings to a current situation (i.e. the global coronavirus shock) would help me to more thoroughly understand the economic concepts and the results presented in this paper.

Didi Pace

I was not able to grasp the majority of this article, even upon 2 reads. Hopefully our class tomorrow will clear things up. From what I understand, previous studies have suffered from not seeing the whole picture of supply and demand. Both price of the bonds and the volume/composition of international lending are impacted by US interest rates. As such, higher US yields negatively impact the demand for international bonds. It is wild how truly interconnected our global economy is… how the economic state of our country influences the flow of financial capital to another developing country. If we refuse to do anything else to aid in the development of foreign countries, let us just keep our treasury yields low. Rates are historically low at the moment- how are international investors behaving as a result? I wonder what the authors would be saying in an updated 2020 version of this research.

Mason Shuffler

This was definitely a tough paper to read compared to the previous papers we have reviewed in this class. However, it is quite interesting to consider how even though the global financial markets are incredibly complex, they are all interrelated and frequently have a push-pull effect on one another. Due to this interconnectedness, it is important to realize how the interest rates and bond yields of developed countries can have negative effects on the rates and yields of developing countries, and vice versa. I would be quite interested to know the current state of the global financial markets due to the coronavirus pandemic. I know that US rates are incredibly low. How does this affect the markets of developing nations? It is interesting to me how developed nations can have such a big impact on developing nations. It almost seems as though the two would be split into two separate market categories due to the vast differences between the two types of nations, but I suppose this goes to show how concentrated a large amount of power can be in some developing countries.

Gus Wise

I thought this paper was interesting as it shows how markets in developing countries can be vulnerable to setbacks outside of their own control. I also liked how the paper broke up markets into different geographical areas. As we have learned in class, just because a strategy for development works in one country in one part of the world, it does not mean that it will work for a different country somewhere else. The article takes this into account as exchange rates very between countries with different forms of currency.

Eichengreen and Mody examine the effects that changes in interest rates in the United States has on developing markets. Are there other industrial countries who could alter the developing markets due to shifts in their interest rates?

Mercer Peek

I agree with some of my classmates- after returning to this paper multiple times, I haven’t quite gotten it all down. There is a lot of technical terminology and references to fiscal policies that I have yet to learn. The literature review notes that other studies of the topic have related the pricing of international bonds to a vector of country and period characteristics. Can we discuss the limitations of this form of modelling? The authors point out that this regression can only be used when positive decisions to borrow and lend are made, but I don’t understand why that is so. The authors go on to say that their equation is better because it requires information on those who don’t issue bonds. I understand that a more complete analysis includes those who do and don’t participate in the bond market. However, I would appreciate a more detailed discussion of the differences in the mechanics of the two models.

Christina Cavallo

To be completely honest, I had trouble with this paper. I took away that interest rates in advance industrial countries such as the US have a powerful impact on the state of global financial markets. These interest rates determine the pricing of external debt as well as the capital flows to emerging markets. This analysis “confirms that global credit conditions have had an important impact on the market for developing country debt”. This paper goes beyond previous studies that hide the underlying relationship of the link to emerging-market spreads and the U.S interest rates. They explain that this is due to the U.S interest rates affecting not just the price of new issues but the the volume and composition of international lending as well. As this paper states, the interest-rate effect has been overlooked due to the differentiation of supply and demand responses by region as well as the fixed and floating-rate issues. The tendency for poor credit risks to exit the market during high U.S rates hints that many fail to control for the thought that there is no positive association between emerging-market spreads and US interest rates as spreads dip downward. I had trouble with the language and the financials within this paper, so I am looking forward to getting a better understanding of it tomorrow in class.

Frances McIntosh

I, like many others, felt that this paper was very difficult to comprehend, even reading through it a few times. From what I understood, the paper strives to show the effects of a country’s interest rates on emerging market spreads through international capital flows. They propose two possible scenarios for foreign finance and emerging markets. The first scenario is that the price and availability of foreign finance depend largely on conditions in the capital-importing countries, then the borrowers regulate inflows. The second scenario is that the price and availability of funds depends heavily on external financial conditions, and emerging markets will either be inundated by and starved of foreign capital. I was also confused by some of the theories behind their regression analysis, but they ultimately find higher U.S. rates have a negative effect on the demand by international investors for fixed-rate issues by Latin American borrowers. The authors also decide the full supply and demand model has been overlooked by previous research. This oversight is possibly why previous studies have not found the interest-rate effect on emerging market spreads. This paper is very interesting because it made me contemplate the interconnectedness of financial market. Obviously this is not a new concept, but it definitely highlighted the importance on interconnectedness in my mind and also emphasized the complexity of the concept. Hopefully we will get a better understanding of the paper after discussing it in class.

Julia Foxen

This paper was honestly very confusing to read through and used a lot of economic terminology that I do not completely understand. My main takeaway was that this paper seeks to rectify the long-standing account that maintains that the state of global financial markets act as a “determinant of capital flows to emerging markets and the pricing of external debt” (23), as proxied by interest rates in advanced industrial nations. While the authors’ analysis confirms that global credit conditions have had a significant impact on the market for developing-country debt, “this effect is evident only upon controlling for the impact of U.S. interest rates on the decision of developing-country borrowers to issue debt” (23). This finding indicates that when interest rates are at play (i.e. fixed and floating rate issues), they have an important impact on supply and demand responses in various regions.
While I feel like I have grasped some key takeaways of the paper, I look forward to discussing these concepts more in class tomorrow. Further, I hope to discuss the paper’s focus on the market for international bonds and how this focus affects their research approach.

Andrew Frailer

I found this paper to be one of the most conceptually difficult from the class thus far. I returned to it several times and I think that I was able to pull out the most relevant information though. My understanding is that interest rates in developed industrialized countries, specifically the U.S. given the size of the economy, has a significant impact on foreign investment. The basic idea being that as interest rates in the U.S. fall, people are more likely to invest in other countries' debt in order to realize greater returns. I would imagine that there is some basic threshold above which many people would be unlikely to pull their funds from U.S. bonds, considering that this is a much safer investment than some other countries (Venezuela for example). I saw that much of the study was focused on this external approach, saying that the effects of policy reform can be part of the puzzle as the supplier. I imagine that domestic reform on the part of the developing country could be of crucial importance to securing foreign investment, given that better institutions and financial standings would decrease the risks associated with purchasing that countries bonds. One question that I had is what we should do when there are high interest rates in the United States or other major countries. If we are still worried about assisting in funds for development, then some outside, potentially NGO participation might be necessary in order to make up for the lack of funding. In a way, and this might be a reach, but it would be as if the aid would be a cure for market failure given that foreign investment is below its optimal point. I am looking forward to discussing this paper in class tomorrow, and hopefully we can clear up the parts of this paper which were especially confusing.


What I understood of this paper, I found to be very interesting. We spend a lot of time talking about what countries can do themselves to assist in the development process and alleviate poverty. However, we haven't discussed the possibilities for developed countries to help very much beyond throwing money at the developing world. The idea that developed countries can help by just adjusting their interest rates, which is a relatively low effort is promising. Of course there are implications for the domestic economy as well, but compared to sending in military troops just to help "keep the peace" and "bring democracy" to developed countries as a thinly veiled form of colonialism sounds more expensive and like more work. The findings indicate that high US interest rates lead to borrowers with poor credit to drop out of the market specifically in Latin America. This is unsurprising due to the earlier finding that countries with lower credit rating residuals are more willing to come to market for higher interest rates, which is also intuitive. I am really looking forward to combing through the finer details of this paper tomorrow.

Sydney Goldstein

To mirror the sentiments of most of my classmates, this paper was very difficult to understand. From what I do understand it seems that past econometric studies were unable to provide support for the concept that the condition of global financial markets such as the bonds market, as measured through interest rates in advanced industrial countries such as the US, act as a determinant of capital flow to emerging market and the pricing of external debt. The reason that past studies failed is because they relied upon disaggregated data. This study aimed to improve upon past studies by looking at both, “international investors’ appetite for developing-country debt but also the borrowers’ decision to supply these obligation”. This study found, by looking at the international bonds market, that global credit conditions do have an impact on the developing country debt market. It found that higher US interest rate lower demand by international investors for fixed-rate issues by Latin American borrowers. If I am understanding this correctly, this makes intuitive sense since when the rates are higher in the US, the returns to investment will be greater and thus demand will increase drawing demand away from the fixed-rate issues. Because this paper seems to rely heavily on the interest rate and bonds market, I wonder how shocks to the bonds market would impact the findings of this paper. I also wonder more specifically on how global shocks such as the current pandemic would effect it versus and regional shock would impact it.


This paper was very difficult to grasp and it required a lot of thought experiments and discussions with friends for some clarity. My understanding is that many studies fail to control for the decision to issue bonds in emerging countries in response to high interest rates in industrial countries. It seems like the paper first illustrates the relationship between interest rates in industrial markets and the demand of bonds in emerging markets. Since returns on US bonds will be greater with a higher interest rate, demand for bonds in Latin America will go down, bringing the price down as well. However, this relationship is not maintained unless the decision to issue a particular number of bonds is controlled for. Specifically, once an emerging country sees that US interest rates are high, they will issue less bonds in order to bring the price of bonds up. Therefore, if you don't control for this underlying behavior, we will expect interest rates to increase in emerging countries. However, since this mechanism is in place, interest rates are not increasing in emerging countries as much as we expect it to or are decreasing altogether, and therefore, capital flows remain mostly directed towards industrial countries. Because emerging countries are unable to attract capital inflows, their growth is stunted and they remain dependent on industrial country interest rates for growth and are more susceptible to capital flight.

Adelaide Burton

This paper compares the inside and outside view of what drives capital flows in emerging markets. The inside view is the idea that internal factors like reform, government stability, and improved infrastructure attract investors to emerging markets, while the outside view is the idea that low interest rates in the US drive lenders to search for alternative emerging markets that may have a higher yield. One view of the internal draw was observed in the 90s with reform in Latin America and the increase in capital, but it happened to coincide with a steep drop in US interest rates. The paper asserts that both push and pull factors are at play as drivers of capital. Emerging markets have a higher potential for growth than developed economies like the United States, but also have significantly higher risk. This paper tracks the relationships between internal and external factors on lending, which is essentially the supply of debt issuance and the demand of these high yield securities, and concludes that both inside and outside factors affect capital flow. I'm not 100% sure I understood the conclusion correctly, but the premise of analyzing the push/pull factors was interesting.

Matthew Todd

I found this to be a very interesting read. Interest rates are something that I'd admittedly put very little thought into in the past and the idea that they could have a significant impact on developing countries. The global credit conditions can be manipulated in order to aid these countries, and I'm curious about the extent to which this can be done to maximize global utility. I was also interested by the idea of other's failures to identify an interest-rate effect. I'm curious as to whether this will become common knowledge, and whether it will result in any kind of concerted global efforts to aid developing nations. This really makes me think about economics as a whole, how what I think would be the causal factors for something could be completely unrelated, while some connection I'd never have made, like interest rates and development, could have a substantial impact on one another.

Danny Lynch

It seems odd to me that the structural reform within developing countries seemed to always take place at the same time as declining interest rates in industrial countries (at least this is what happened in the 1920s, 1970s, and 1990s). Before even considering econometrics to try and find support for either of the two reasons that caused increased capital flow, is there really no occasion where a developing country undertook serious reform at a time of rising rates in industrial countries? If no such example exist, this would lead me to believe that structural reform is endogenous to increased capital flows. Would it be possible that the act of investing in a development country could itself spur reform, and that this reform likewise would encourage investment? If this were the case, one could argue that lower rates in the US influenced an initial flow of financial capital, whereby leading to reforms in the developing country and thus a second flow of capital for an entirely different reason from the first. However, based on the historical timeline, this doesn’t seem like it was the case (since capital flowed “irrespective of the pace of domestic reform”). Another thought I had is in regards to the ability of East Asian issuers of fixed-securities to be able to time the market and successfully avoid issuing bonds when US rates are high. How is this the case, and why don’t we see the same thing for Latin American countries?

Jack Parham

As many have already pointed out this was a difficult paper to understand fully and I do not believe that I have a great understanding of the underlying empirical research and study design. With that being said I found it incredibly useful in describing how globalization and interwoven markets have really begun to affect the world around us. I think often times we still conceive of financial markets as being contained within a country's borders rather than on a global scale. It becomes clear in an article such as this one that "country" specific markets do affect other countries in a sort of butterfly effect way. Tracking how US interest rates affect borrowing in developing countries is certainly an interesting phenomenon that we ought to study in great depth. Reading this paper and seeing the impact that interest rates have on other countries really sparked my interest in how the FED operates. The FED consistently maintaining interest rates has led to steady growth in the United States that you simply do not see when monetary policy is not controlled properly. Here, it is natural to think of the extreme cases where monetary policy has either been ignored or manipulated. All of the sudden you can end up with countries such as Venezuala who have experienced hyper-inflation to such a degree that foreign investment is nearly nonexistent. I have attached a link to a graph looking at the Venezualan inflation rate from 1984-2020 it is truly astounding and I would love to talk about it more in class and the implications of hyper-inflation.



From what I understand, this paper basically serves to reinforce previous findings that say interest rates in advanced countries play a big role in the pricing of external debt and the flow of capital into poor countries. This creates the possibility for countries like the US to utilize domestic monetary policies to benefit developing countries. This idea is fascinating because this method is so different from the previous topics we discussed in class. The paper states that "higher U.S. rates induce Latin American borrowers and East-Asian floating-rate issuers seeking to minimize their debt-servicing costs to slide down their supply curves," which ultimately "puts upward pressure on prices." I am interested in learning whether the US had taken advantage of its influence on prices in the past to benefit other countries and whether it had unintentionally hurt countries before. I think this paper was a bit difficult to read, so I look forward to reviewing important details tomorrow in class.


Interest Rates in the North and Capital Flows to the South: Is There a Missing Link? By Barry Eichengreen and Ashoka Mody speculate the effects of interest rates and global credit lines and their effect on developing nations. The analysis of previous studies followed by new evidence and exploratory regression sections were not entirely clear to me. However, the paper had some clear takeaways. From my understanding, “the volume and composition of international lending, and not just the price of new issues, are affected by U.S. interest rates.(3)” As such an influential nation, the negative spillover effects of higher capital ratings have a significant ability to sway global trends. This is reiterated when Eichengreen and Mody mention, “countries with higher credit rating residuals (better credit ratings, other things equal) are more inclined to come to the market.(19)” The two authors then go into detailing specifics stating, “low interest rates in the industrial countries in encouraging the resurgence of capital flows to emerging markets.(7)” On the other side of things, nations with, “The tendency for poor credit risks to drop out of the market puts downward pressure on spreads, other things equal.(22)”

On a final note, in discussion of,”which Asian countries had implemented structural reforms, boosted domestic saving and investment, and moved strongly in the direction of export-promoting policies,” I was strongly reminded of South Korea’s rise to development.

Austin Lee

It is interesting to see that when looking at interest-rate effects on the global market, past studies have not accounted for the supply and demand effects on bond issues and prices. I find this extremely interesting as one of the fundamental tools that you initially learn in economics is the relationship between supply and demand. In fact, in the conclusion of the paper, the authors say, “Textbook economics emphasizes the need to look at both blades of the supply-demand scissors. In the present context, this means looking not just at international investors’ appetite for developing-country debt but also the borrowers’ decision to supply these obligations (p. 23).” However, what I was most shocked about from the reading are the past studies that talk about the large effects industrial country interest rates have on emerging markets. When the economic outlook looked promising in the U.S., Japan, and Europe, interest rates and bond yields began to rise in these countries. This made it less attractive for emerging markets to take up these higher yields and interest rates. The paper says, “These events put a damper on capital flows to merging markets and, in the view of those who emphasize external factors, helped to precipitate the Asian crisis (p.7).” I had never thought about the prosperity of industrial countries’ effects on emerging and developing countries.

Ben Graham

Given my lack of familiarity with the subject and its high degree of technicality, I found this paper by Barry Eichengreen and Ashoka Mody to be challenging. While I have a firm comprehension of the general argument, I found the section related to the empirical strategy to be particularly complex. Thus, I am looking forward to tomorrow's discussion, as it will help me better understand this paper.

Still, I found the work to be interesting. Here, the authors explore one of the most fundamental aspects of economic development: the roles of policy and interest rates in regard to stimulating growth. Historically, different economists have argued for the predominance of one of these devices. Some have maintained that policy that promotes macroeconomic stability and economic liberalization is the main driver behind development. On the other hand, others contend that low interest rates in industrial countries play a larger role, as they facilitate the flow of capital abroad due to the more appealing returns. To put it simply, some uphold the importance of internal factors while others uphold that of external factors.

Previously, studies conducted using an ordinary-least-squares regression have downplayed the role of interest rates. However, the authors argue that such a regression is too simplistic to measure such a complex phenomenon. In their own empirical analysis, they find that lower interest rates in industrial countries are strongly associated with development abroad. Such results bare tremendous consequences going forward, as governments in developing countries will be more knowledgeable when forming policy to facilitate growth.

One area of the paper that I found specifically interesting was the section related to how the effects of interest rates differ across regions. For example, they find significant differences between Latin American and East Asian bonds. Such a finding is reminiscent of our previous discussion related to the "Confucian Ethos" or "Protestant Work Ethic." Clearly, while economics has become a largely quantitative field, more qualitative things like culture still play a significant role. It would be interesting to further explore this topic.

Joey Dickinson

To echo my classmates, this paper was very difficult. The limited understanding that I came away with way that US interest rates can influence developing markets in multiple ways, the effects of which have been disputed. For example, high US interest rates can divert investment from developing foreign markets by raising opportunity costs of investing abroad; but the demand side is also important, and the paper points out that previous studies have suffered from neglecting to look at both the supply and demand sides of the equation. Regardless, because our global economy is so interconnected, do we then have an obligation to try to keep interest rates low to the extent that it doesn't harm our economy too much? As global neighbors, it seems the right thing to do. Does the Fed take this into consideration when creating policy already?

Savannah Corey

This was a very complex, technical read, yet very thought-provoking. Eichengreen and Mody's illustration of the interconnectivity of U.S. bond yields and interest rates with those of developing countries. From what I understood is that on one hand internal factors such as government policies that promote macroeconomic stability and economic liberalization incentivize investors, whereas on the other hand, low interest rates in developed nations like the United States increase capital investments. Similar to the thoughts of many of my classmates, I was shocked that the financial prosperity of developed countries has such a dramatic effect on emerging markets in developing countries. I am eager to discuss in class how the current political climate and COVID-19 effect flow of financial capital between developed and developing countries.


Like many others, I also had trouble understanding parts of this paper and some of the terminology, but I think I was able to come away with a basic understanding of the key findings and research questions of the paper. From the authors’ discussion before and after their regression results, it appears the paper aims to address the causal effects of industrial country credit conditions on both the supply and demand of developing country debt. The authors look to explore the impact of U.S. interest rates on foreign investors’ demand for developing country debt and the willingness of developing country borrowers to issue new debt, which in turn affect yield spreads in emerging markets. The authors note that the effect of U.S. treasury rates on emerging market spreads will depend on if the change in U.S. treasury rates affects the demand for developing country debt or if it affects the supply of newly issued bonds from developing country borrowers. Additionally, the effect of U.S. interest rates on emerging market yield spreads, and international capital flow towards emerging markets in general, depends on if the bonds are floating or fixed-rate and on what region the analysis is focused on. To address this and previous literature, the authors attempted to account for both the demand-side and supply-side effects of U.S. interest rates on developing countries’ bond market conditions and yield spreads. In their regression results, the authors find evidence of the search-for-yield hypothesis which relates to the effect of U.S. treasury rates on the demand for bonds issued by developing country borrowers. In this case, a rise in the U.S. interest rate will result in decreased demand for developing country bonds, particularly for fixed rate bonds in Latin America. All else being equal, in the U.S. bond prices would fall as interest rates rise and the yield to maturity on previously existing bonds will rise for new buyers. Additionally, the interest rate risk associated with newly issued U.S. bonds will decrease after the rise in interest rates, further creating more attractive lending conditions in the United States compared to emerging markets (if I’m remembering correctly). On the other side, the authors found that higher U.S. interest rates affect the supply of developing country bonds by reducing the willingness of borrowers in developing countries from issuing new debt. First, higher U.S. interest rates cause decreased supply of newly issued fixed-rate bonds in emerging markets. The reasoning for this was a little unclear, but I’m guessing it is due to the fact that the cost of debt for borrowers in emerging markets will rise and U.S. interest rates rise, since they will have to compete with the high interest rates of U.S. bonds. The decreased supply would increase bond prices, which in turn puts downward pressure on bond yields and yield spreads. The authors also found that higher U.S. interest rates affect the supply of bonds by borrowers in developing countries by causing high risk borrowers to drop out of the market. If I have that correct, this would arise because of the increased yield on relatively “riskless” U.S. securities. Rising U.S. interest rates would be associated with rising yields on low-risk U.S. bonds, forcing poor credit borrowers, who would need to issue bonds with relatively higher interest rates due to their risk of default, to drop out of the market.

Olivia Indelicato

Like many of my peers have written above, I also struggled with the technicality of this paper, as well as the background section that mentioned many examples from past US international finance history that I am largely unfamiliar with. From my understanding, it appears that past econometric analysis has been lacking in its evaluation of the importance of interest rates in developed countries on capital flows to developing countries. This paper provides evidence that the previous literature has been inaccurate, and has undermined this important relationship. It therefore follows, and makes a lot of sense, that interest rates in developed countries such as the United States play a large role in the capital flows toward developing countries. While it seems the United States has adjusted its interest rates in order to assist the domestic economy, perhaps United States should be more cognizant of its role in developing markets when adjusting monetary policy. This paper was last revised in 1998, and I would be interested to see what the authors would say about the 2008 financial crisis, which began in the United States and quickly spread to all (or nearly all) countries across the globe. I wonder what role that financial crisis would play into their analysis about the role of US and other developed countries’ interest rates on capital flows in developing countries, and whether the crisis hurt developing countries’ capital flows more or less than the other crises, such as the Tequila crisis, that the paper mentions.

Jackie Tamez

The article basically states (from my understanding) that interest rates in major “money centers” affect borrowing at the international level. As expected, lower interest rates encourage capital flows, while rising rates hinders wealthier countries from lending to emerging markets. It is interesting to read the two different viewpoints arguing whether the price and availability of foreign funds relies on internal or external conditions. It is also emphasized that previous studies “using regression analysis to link primary spreads to U.S. treasury yields suffer from limitations that disguise the underlying relationship” due to their failure to consider how U.S. interest rates directly impact them (for example, when applied to spreads on Latin American issues or East Asian bonds). I tried decoding the more complex concepts, but it was really confusing even when I would go back and reread them. I would like to dive more into the spreads on the tables and implications because it was a lot to unpack. It'd also be interesting to talk about how this applies to our current economic/political environment, especially in light of COVID. Since this paper was written in 1998, I also wonder if any recent research provides updated data regarding interest rates and the global markets.

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