Abstract
COVID-19 has caused an increased demand for safe assets, causing capital to flow out of emerging and developing market economies, while higher credit spreads and a weaker exchange rate have caused a spike in inflation. This paper analyses the fallout to the real economy and fiscal measures implemented by governments to reduce the externalities stemming from COVID-19. It finds that capital flow dynamics during the pandemic have amplified the adverse effects of higher credit spreads on domestic exchange rates. Macroprudential policies designed to address capital flow vulnerabilities will improve the transmission of monetary policy to the real economy and lessen vulnerabilities in the EM financial systems.
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