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This paper studies the sudden stop in capital flows that emerging markets experienced throughout the first months of the pandemic. First, we find that the sudden stop in capital flows was strongly affected by lower portfolio investments by non-bank financial intermediaries: for many emerging markets, the magnitude of the sudden stop exceeded that of the Global Financial Crisis. Second, we show that emerging markets adopted expansionary fiscal and monetary policies to deal with the sudden stop and the resultant recession; moreover, the use of macroprudential measures and unconventional monetary policy are part of a wider policy toolkit, compared with other crises. Third, we estimate the adequacy of current IMF resources if emerging markets were hit by a systemic sudden stop. We find that the IMF’s resources are adequate in the event of a moderate sudden stop; in the event of a more severe scenario, the financing needs of emerging markets could go beyond the IMF’s lending capacity, even after the other layers of the global financial safety net have been deployed.

Capital Flows During the Pandemic: Lessons for a More Resilient International Financial Architecture