The Financial Crisis of 2007–09 and Emerging Countries: The Political Economy Analysis of Central Banks in the Brazilian and Korean Economies

Abstract

Insofar as the global crisis of 2007–09 can be understood as a fully-fledged crisis of the financialization era, it has presented new challenges for central banks. However, this paper argues that the central banks' interventions in key middle income countries (Brazil and Korea) have reinforced the main characteristics of financialization and have been different from their previous foreign exchange crisis of the late 1990s. The key reasons for this sharp contrast in central bank interventions can be found in the origins of the recent crisis — in developed financial markets — which is different from the previous one which originated in emerging markets. Furthermore, the higher level of financial integration of both economies in relation to the late 1990s is a more important factor. The Korean and Brazilian experiences show that liquidity management by central banks has been conditioned by international capital flows, and more importantly they have reinforced this trend through their operations in spite of differences in the dynamics of capital flows, in their timing of reserve accumulation and in their level of financial integration.