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

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  • Eichengreen, Barry
  • Gupta, Poonam

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.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6754.

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Date of creation: 01 Jan 2014
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Handle: RePEc:wbk:wbrwps:6754

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Related research

Keywords: Debt Markets; Currencies and Exchange Rates; Emerging Markets; Economic Theory&Research; Macroeconomic Management;

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  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5644, C.E.P.R. Discussion Papers.
  2. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2010. "The worldwide governance indicators : methodology and analytical issues," Policy Research Working Paper Series 5430, The World Bank.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Comment l’anticipation du tapering affecte-t-elle les pays émergents ?
    by ? in D'un champ l'autre on 2014-02-01 14:50:00
  2. Comment les annonces du tapering se transmettent aux pays émergents
    by ? in D'un champ l'autre on 2014-03-18 09:21:00
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Cited by:
  1. Joshua Aizenman & Mahir Binici & Michael M. Hutchison, 2014. "The Transmission of Federal Reserve Tapering News to Emerging Financial Markets," NBER Working Papers 19980, National Bureau of Economic Research, Inc.
  2. Choy, Marylin & Cerna, Jorge, 2014. "Comportamiento de los mercados financieros peruanos ante el anuncio del tapering," Working Papers, Banco Central de Reserva del Perú 2014-011, Banco Central de Reserva del Perú.
  3. Richhild Moessner, 2014. "International spillovers from US forward guidance to equity markets," DNB Working Papers, Netherlands Central Bank, Research Department 427, Netherlands Central Bank, Research Department.

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