Most importantly, we thought we had “decoupled” – that even if advanced economies went into a down turn, emerging market economies will not be affected because of their improved macroeconomic management, robust external reserves and sound banking sectors. 12. The crisis dented, if not fully discredited, the decoupling hypothesis. It affected virtually every country in the world, including India.
As a result, capital was not always channelled into its most productive use, and in various countries this fostered an unsustainable asset price increase that led to high private-sector debt and excess domestic demand; the housing markets in several advanced economies are a prominent example. These undesirable developments were further encouraged by loopholes and weaknesses in the regulatory framework.