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Effects of Fed Announcements on Emerging Markets: What Determines Financial Market Reactions?

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Listed:
  • Prachi Mishra

    (International Monetary Fund)

  • Papa N’Diaye

    (International Monetary Fund)

  • Lam Nguyen

    (University of California)

Abstract

This paper analyzes market reactions to the 2013–2014 Fed announcements related to the tapering of asset purchases and examines how these reactions are influenced by financial depth. The study focuses on long-term government bond yields and uses daily data for all emerging markets. Controlling for all time-invariant country characteristics as well as time-varying macroeconomic fundamentals (changes in current account, fiscal balance, GDP growth, and inflation), countries with deeper domestic financial markets (as measured by higher bank credit, M2, M3, or stock market capitalization) experienced smaller increases in government bond yields during 4-day windows around Federal Open Market Committee announcements related to tapering. Countries with better macroeconomic fundamentals (measured by improvements in current account, fiscal balance, and GDP growth) also experienced smaller increases in government bond yields around such episodes.

Suggested Citation

  • Prachi Mishra & Papa N’Diaye & Lam Nguyen, 2018. "Effects of Fed Announcements on Emerging Markets: What Determines Financial Market Reactions?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(4), pages 732-762, December.
    • Handle: RePEc:pal:imfecr:v:66:y:2018:i:4:d:10.1057_s41308-018-0068-2
    DOI: 10.1057/s41308-018-0068-2
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    References listed on IDEAS

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    Cited by:

    1. Mehrotra, Aaron & Moessner, Richhild & Shu, Chang, 2019. "Interest rate spillovers from the United States: expectations, term premia and macro-financial vulnerabilities," BOFIT Discussion Papers 20/2019, Bank of Finland Institute for Emerging Economies (BOFIT).
    2. Antonia López‐Villavicencio & Marc Pourroy, 2022. "Fed's Policy Changes and Inflation in Emerging Markets: Lessons from the Taper Tantrum," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 1099-1121, June.
    3. Xichen Wang & Cheng Yan, 2022. "Does the Relative Importance of the Push and Pull Factors of Foreign Capital Flows Vary Across Quantiles?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(2), pages 252-299, June.
    4. repec:zbw:bofitp:2019_020 is not listed on IDEAS
    5. Shakirudeen Taiwo & Josine Uwilingiye, 2023. "New evidence on sources of macroeconomic fluctuations in sub‐Saharan African countries," African Development Review, African Development Bank, vol. 35(2), pages 181-197, June.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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