Tapering talk: the impact of expectations of reduced federal reserve security purchases on emerging markets

Barry Eichengreen and Poonam Gupta

No 6754, Policy Research Working Paper Series from The World Bank

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 very differently. This paper uses data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. It finds 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 (the budget deficit, the public debt, the level of reserves, or the rate of economic growth) did not provide insulation. A more 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. This is interpreted as showing that investors are better able to rebalance their portfolios when the target country has a relatively large and liquid financial market.

Keywords: Economic Theory&Research; Macroeconomic Management; Debt Markets; Emerging Markets; Currencies and Exchange Rates (search for similar items in EconPapers)
Date: 2014-01-01
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (104)

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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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