During recent months, however, correlations across markets in EMEs have increased, perhaps suggesting a lower degree of investor differentiation. Against this background, currency-market volatility has increased to levels that prevailed during the Eurozone sovereign debt crisis, while EM currencies on average depreciated by 14 per cent4. The popular narrative tends to focus on the rand-dollar exchange rate.
Our review was prompted by changes in key long-run features of the economy: The recognition that price inflation is much less sensitive to labor market tightness than historically—that is, a flat Phillips curve; that the equilibrium interest rate is much lower than in the past; and that trend underlying inflation has moved somewhat below 2 percent.