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Update on US and EM business cycle dynamics

Weekly investor research

24 December 2018

Markets are worried about business cycle dynamics as the era of easy money ends. A priori, such concerns ought to apply most to developed markets, which benefitted from enormous stimulus in the past decade, but ultimately it is an empirical question. To that end, we present updated estimates of real effective exchange rate misalignment and policy accommodation in nineteen EM countries as well as the US. We find that EM countries are very close to equilibrium, while the US stands out with an overvalued real effective exchange rate and a monetary policy stance, which is still fanning the flames of demand. Based on these numbers, EM investors are justified in being optimistic about the future, while US investors need to re-examine the bullish thesis of the past decade.

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