What happens to EMEs when US yields go up?

Julián Caballero and Christian Upper

No 1081, BIS Working Papers from Bank for International Settlements

Abstract: This paper explores why some episodes of US yield increases result in investor retrenchment from emerging markets and others do not. To answer this, we identify episodes of sharp increases in US 10-year Treasury yields and explore under which conditions these are associated with negative outcomes in emerging markets. We focus on four outcome variables: local currency yields, exchange rates, equity prices, and portfolio fund flows. We find that increases in US yields are more likely to be associated with adverse outcomes in emerging markets when they reflect (i) a rise in the US term premium, (ii) coincide with dollar appreciation, and (iii) rising inflation expectations in the US and in EMEs. The effects of these variables are highly non-linear and economically significant as well as robust to a variety of sensitivity checks.

Keywords: monetary policy; international spillovers; term premium; US dollar (search for similar items in EconPapers)
JEL-codes: F30 F36 F42 F65 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-fmk, nep-ifn and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1081

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