Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets

Barry Eichengreen and Poonam Gupta

MPRA Paper from University Library of Munich, Germany

Abstract: In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected differently. We use data for exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. We find that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals did not provide insulation. An important determinant of the differential impact was the size of the country’s financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves and equity prices. We interpret this as investors being able to better rebalance their portfolios when the target country has a relatively large and liquid financial market.

Keywords: Emerging Markets; Tapering; Quantitative Easing (search for similar items in EconPapers)
JEL-codes: F3 F32 F42 (search for similar items in EconPapers)
Date: 2014-01-19
New Economics Papers: this item is included in nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (106)

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Related works:
Journal Article: Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets (2015)
Working Paper: Tapering talk: the impact of expectations of reduced federal reserve security purchases on emerging markets (2014)
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