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International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals?

Shaghil Ahmed, Brahima Coulibaly and Andrei Zlate ()

No 1135, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs). Our analysis covers the so-called taper-tantrum episode of 2013 and six earlier episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in quite early and persisted throughout this episode. (3) Controlling for economic fundamentals, we also find that, during the taper tantrum, financial conditions deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) For earlier episodes, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities during EME crises of the 1990s and early 2000s. (5) That said, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode. Differences in economic fundamentals played a role in explaining the heterogeneous EME financial market responses during the global financial crisis of 2008, and the role of fundamentals appeared to progressively increase through the European crisis in 2011 and subsequently the 2013 taper tantrum.

Keywords: economic fundamentals; financial spillovers; Emerging market economies; vulnerability; taper tantrum; depreciation pressure; financial stress (search for similar items in EconPapers)
JEL-codes: F30 E50 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2015-04-22, Revised 2015-04-22
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-opm
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http://dx.doi.org/10.17016/IFDP.2015.1135 http://dx.doi.org/10.17016/IFDP.2015.1135 (application/pdf)
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Related works:
Journal Article: International financial spillovers to emerging market economies: How important are economic fundamentals? (2017) Downloads
Working Paper: International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals? (2017) Downloads
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