Chart 9: Emerging market economies could be running to stand still in the future Average 2009-18 Probability density Average 1996-06 Impact of push factors 0.12 Impact of push factors with 2030 amplification due to shifting composition (col 3, chart 10) 0.10 0.08 0.06 0.04 0.02 0.00 -8 -6 -4 -2 Capital flows as a % of GDP  0  2  4  6  8  10  12  14  16  18  Sources: IMF, EPFR, IIF and Bank staff calculations. Notes: This chart shows conditional distributions of capital flows to EMEs post-the 2008 crisis (green), and conditioning on a one standard deviation negative “push shock” (red), as proxied by our global financial conditions index. The diamonds highlight the fifth percentile, which is our preferred measure of Capital Flows-at-Risk The dotted grey distribution results from increasing the sensitivity of the distribution to push shocks in line with the scalar in the third column of chart 10, assuming they apply through the distribution (rather than only to 5th percentile). Estimating the impact of these vulnerabilities on the full distribution is a rich area for future work. The teal distribution conditions on average push and pull factors 1996-06.
These actions will tend to increase the Treasury’s net interest costs and pull down the Federal Reserve’s remittances to the Treasury. Together, these two effects will sharply push up the Treasury’s net interest burden. To show how this may play out, let’s use as an illustration a “current policy” baseline based on information provided by the Congressional Budget Office, including its macroeconomic assumptions. Under these assumptions, the output gap is closed and monetary policy is normalized by 2017. As shown in Figure 5, net debt service is projected to rise to 3.3 percent of GDP by fiscal year 2020 up from 1.0 percent in 2011, based on an assumption that the interest rate for three-month Treasury bills will rise from around 10 basis points today to 3.8 percent by 2020 and the interest rate on benchmark 10-year Treasury securities will increase from around 2 percent today to 5 percent by 2020. On top of this, Federal Reserve remittances are projected to fall sharply. In its recent current law baseline projection, the CBO calculates that net remittances will decline from a peak of 0.55 percent of GDP in 2011 to a long-run average of around 0.2 percent by 2017 and beyond. Thus, on the current policy baseline, the combined effect of higher debt service and lower remittances will total 2 ¼ percent of GDP by fiscal 2020 relative to the current fiscal year (Figure 5). Of course, this assumes that interest rates follow the trajectory used in the CBO baseline.