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At the time of writing there were widespread concerns about the health of the U.S. economy.There is conclusive evidence that the pace of growth has slowed, which has prompted theFederal Reserve to cut interest rates on two occasions (a total of 100 basis points thus far). Asusual, when faced with this kind of turning point, analysts and policy makers alike wonderwhether the United States will achieve a “soft landing” or whether the downturn is more seriousand protracted—in the worst scenario, the new weakness could signal the end of the neweconomy. Furthermore, recent inflation surprises have not been encouraging, as higher-thanexpectedinflation numbers may curtail the Federal Reserve’s desire and ability to actcountercyclically. In this paper, we do not attempt to provide any insights into what lies ahead for the U.S.economy. Our focus is on gaining a better understanding of how the U.S. business cycle, itsassociated monetary policy cycle, and their interaction affect developing countries. The questionof North-South linkages is hardly a new one; the role of trade and primary commodity markets inlinking developed and developing countries has a long history (see, for instance, Prebisch, 1950and Singer, 1950). The links between debtor and creditor nations are also not new (see Diaz-Alejandro, 1984, Dornbusch, 1985, and Calvo, Leiderman, and Reinhart, 1993). Indeed, what is“new” is that some links that had been thought to be extinct have revived in recent years whilesome “old” links have weakened. As Bordo and Eichengreen (1998) observe, the decade of the1990s shares some of the features of an earlier age of globalization and high capital mobilityprior to World War I; namely, portfolio capital flows to emerging markets have re-emerged as animportant link between northern lenders and southern borrowers. This revival is particularlypronounced in the larger Latin American countries. Some of the traditional links, however, mayhave weakened, as many countries in Asia and Latin America have successfully diversified theirexports away from primary commodities. Hence, terms-of-trade shocks may (in some cases)play a smaller role today than in the past. Both of these observations would suggest that, ingeneral, trade/commodity price links may have weakened while financial links may have becomestronger. However, one must be cautious in interpretation owing to the large variation acrosscountries in the degree of trade and capital market integration. While the share of primarycommodities in Mexico’s exports has declined dramatically in the past 30 years, the importanceof U.S. markets, owing to NAFTA, has soared, which suggests that the trade channel isquantitatively important in the Mexican case.2 These are the questions we analyze. Our focus ison how developments in the United States affect capital flows and growth in emerging marketcountries across various regions and country groups.

The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets