Conversely, a tightening of advanced economy monetary policy in response to a stronger economy should lead these movements to reverse; that is, tightening should reduce capital flows to EMEs and diminish upward pressure on EME currencies and asset prices. Are these basic relationships apparent in the data?
Conclusion The recent reduction in financial stresses in Europe is a welcome development for the United States, given the important trade and financial linkages connecting our economies. However, Europe’s financial and economic situation remains difficult, and it is critical that the European leaders follow through on their policy commitments to ensure a lasting stabilization.