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The Transmission of Federal Reserve Tapering News to Emerging Financial Markets

Author

Listed:
  • Joshua Aizenman

    (University of Southern California and NBER)

  • Mahir Binici

    (Central Bank of Turkey)

  • Michael M. Hutchison

    (University of California, Santa Cruz)

Abstract

This paper evaluates the impact of tapering “news” announcements by Federal Reserve senior policymakers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging-market asset prices respond most to statements by Federal Reserve Chairman Bernanke, and much less to other Federal Reserve officials. We group emerging markets into those with “robust” fundamentals (current account surpluses, high international reserves, and low external debt) and those with “fragile” fundamentals and, intriguingly, find that the exchange rates of the robust group (and, to a lesser extent, equity prices and CDS spreads) were more adversely affected by tapering news than the fragile group. The cumulative effects of tapering announcements after a month, however, appear to be quite similar for both robust and fragile emerging markets. We also show that more financially developed economies are more affected by tapering news, and a plausible interpretation is that more financially developed economies are more exposed, at least in the short term, to external news announcements.

Suggested Citation

  • Joshua Aizenman & Mahir Binici & Michael M. Hutchison, 2016. "The Transmission of Federal Reserve Tapering News to Emerging Financial Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 317-356, June.
  • Handle: RePEc:ijc:ijcjou:y:2016:q:2:a:7
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    References listed on IDEAS

    as
    1. Madhusudan Mohanty, 2014. "The transmission of unconventional monetary policy to the emerging markets - An overview," BIS Papers chapters,in: Bank for International Settlements (ed.), The transmission of unconventional monetary policy to the emerging markets, volume 78, pages 1-24 Bank for International Settlements.
    2. Joshua Aizenman & Mahir Binici & Michael Hutchison, 2013. "Credit ratings and the pricing of sovereign debt during the euro crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 29(3), pages 582-609, AUTUMN.
    3. Mondria, Jordi & Wu, Thomas & Zhang, Yi, 2010. "The determinants of international investment and attention allocation: Using internet search query data," Journal of International Economics, Elsevier, vol. 82(1), pages 85-95, September.
    4. Eichengreen, Barry & Gupta, Poonam, 2015. "Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets," Emerging Markets Review, Elsevier, vol. 25(C), pages 1-15.
    5. Powell, Jerome H., 2013. "Advanced economy monetary policy and emerging market economies," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-17.
    6. Dooley, Michael & Hutchison, Michael, 2009. "Transmission of the U.S. subprime crisis to emerging markets: Evidence on the decoupling-recoupling hypothesis," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1331-1349, December.
    7. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
    8. Nechio, Fernanda, 2014. "Fed tapering news and emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    9. Ahmed, Shaghil & Zlate, Andrei, 2014. "Capital flows to emerging market economies: A brave new world?," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 221-248.
    10. Sims, Christopher A., 2010. "Rational Inattention and Monetary Economics," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 4, pages 155-181 Elsevier.
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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