> To Wall Street, the two [a financial crisis and a recession] are
> inseparable. But the selloff in world markets over the last few
> days was fueled by the perception, true or not, that any U.S.
> recession would hammer the rest of the world. Ergo, RIP decoupling.
Well, I'm not sure that journalists or bloggers do justice to the decoupling story:
http://www.bloggingstocks.com/2008/01/22/economist-decoupling-thesis-may-be-put-on-hold-for-awhile/
Anyway, the way I understand it, the last few days cannot a proper empirical test of the idea. We have to wait for the effects to show. And, just to be clear, decoupling doesn't mean that the BRICs' beta = 0. No matter how decoupled they may be, they are exposed to systemic risk.
But back to the story: In international macro, the idea of decoupling has been around for 10 or 15 years. In the 1990s, Caballero, Aghion, Acemoglou, and other youngsters from MIT and Harvard came up with models of the Schumpeterian creative-destruction argument. A pile of papers followed. At the time, no graduate student of standard macro or monetary economics could escape that stuff. (At this point, people on PEN-L would probably warn readers that those models betrayed Schumpeter's true intention, but whatever. I got my MA in the early 1990s at the New School, so I read Schumpeter under the guidance of Heilbroner and Taylor. For my doctorate though I had to get into this new Schumpeterian economics stuff.) So I'm under the strong impression that the idea of decoupling, as it came to be understood among conventional economists, started there.
In the 2000s, more precisely, a few months after 9/11 shook the markets, at the 2002 annual meeting of the AEA in Washington DC, in the panel on the World Bank and the IMF to be more exact, Caballero (Krugman was there too) went over his idea and made the normative argument in favor of decoupling. I haven't followed what happened later, but I suppose others took the idea and ran with it. I'm sure someone came up with data and ways to empirically test whether poor countries' economies were in fact decoupling, etc. At the time though, the idea was simpler: "It'd be great if poor countries decoupled their cycles from the swings of foreign capital." Totally uncontroversial. So, the bulk of Caballero's presentation was about the technical and institutional aspects of macro hedging. Clearly, the intended audience was contemporaneous or future Latin American central bankers, policy makers, and leaders in the audience.
I wonder now if Rafael Correa (Ph D at the U of IL U-C) was in the audience -- and paying attention. During his campaign, Correa made a very similar argument in a public critique of the way Ecuador's central bank's reserves had been mismanaged. He promised that, as a president, he'd make sure the central bank took the decoupling approach to managing the country's reserves. The video is on youtube.