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

By Barry Eichengreen, P. Gupta. 2014

335 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/2145bdb4a6d1b2eba676fe405e29fc814c6e13ac

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Citations in the corpus

Subordinated Financial Integration and Financialisation in Emerging Capitalist Economies: The Brazilian Experience (2018, background): “…in the last capital flow cycle, as the first ‘tapering’ announcements by the FED in May/June 2013 led to a renewed withdrawal of funds from ECEs (Eichengreen and Gupta 2013, Prachi et al. 2014).21 In addition to their increase in size, capital flows to ECEs have seen important qualitative…”
Unconventional monetary policy and the spillovers to emerging markets (2016, background): “The empirical literature so far typically studies the response of high-frequency financial data to QE announce- 1See Eichengreen and Gupta (2013) and Aizenman et al. (2014) for early empirical analyses of the emerging market response to tapering. ments or includes QE announcements among other…”
How Important is the Global Financial Cycle? Evidence from Capital Flows (2017, background): “Recent contributions include Fratzscher (2011), Forbes and Warnock (2012), Broner et al (2013), Bruno and Shin (2015a), and Cerutti et al (2017).”
Spillovers of U.S. unconventional monetary policy to emerging markets: The role of capital flows (2017, background): “First, it is connected to studies that investigate the effect of the Fed’s UMP on EMEs (financial) conditions in event studies or similar frameworks (Aizenman et al., 2014, Eichengreen and Gupta, 2014, Bowman et al., 2015).”