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The Effect of the Federal Reserve’s Tapering Announcements on Emerging Markets

Author

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  • Vikram Rai1
  • Lena Suchanek

Abstract

The Federal Reserve’s quantitative easing (QE) program has been accompanied by a flow of funds into emerging-market economies (EMEs) in search of higher returns. When Federal Reserve officials first mentioned an eventual slowdown and end of purchases under the central bank’s QE program in May and June 2013, foreign investors started to withdraw some of these funds, leading to capital outflows, a drop in EME currencies and stock markets, and a rise in bond yields. Using an event-study approach, this paper estimates the impact of “Fed tapering” on EME financial markets and capital flows for 19 EMEs. Results suggest that EMEs with strong fundamentals (e.g., stronger growth and current account position, lower debt, and higher growth in business confidence and productivity), saw more favourable responses to Fed communications on tapering. Capital account openness initially played a role as well, but diminished in importance in subsequent tapering announcements.

Suggested Citation

  • Vikram Rai1 & Lena Suchanek, 2014. "The Effect of the Federal Reserve’s Tapering Announcements on Emerging Markets," Staff Working Papers 14-50, Bank of Canada.
  • Handle: RePEc:bca:bocawp:14-50
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    References listed on IDEAS

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    1. Peter J. Morgan, 2011. "Impact of US Quantitative Easing Policy on Emerging Asia," Macroeconomics Working Papers 23215, East Asian Bureau of Economic Research.
    2. 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.
    3. Mackowiak, Bartosz, 2007. "External shocks, U.S. monetary policy and macroeconomic fluctuations in emerging markets," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2512-2520, November.
    4. Michael Ehrmann & Marcel Fratzscher & Roberto Rigobon, 2011. "Stocks, bonds, money markets and exchange rates: measuring international financial transmission," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(6), pages 948-974, September.
    5. Sharon Kozicki & Eric Santor & Lena Suchanek, 2011. "Unconventional Monetary Policy: The International Experience with Central Bank Asset Purchases," Bank of Canada Review, Bank of Canada, vol. 2011(Spring), pages 13-25.
    6. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
    7. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 354, European Central Bank.
    8. Vivek Arora & Martin Cerisola, 2001. "How Does U.S. Monetary Policy Influence Sovereign Spreads in Emerging Markets?," IMF Staff Papers, Palgrave Macmillan, vol. 48(3), pages 1-3.
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    Citations

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    Cited by:

    1. Özmen, M. Utku & Yılmaz, Erdal, 2017. "Co-movement of exchange rates with interest rate differential, risk premium and FED policy in “fragile economies”," Emerging Markets Review, Elsevier, vol. 33(C), pages 173-188.
    2. Yildirim, Zekeriya, 2016. "Global financial conditions and asset markets: Evidence from fragile emerging economies," Economic Modelling, Elsevier, vol. 57(C), pages 208-220.
    3. Anaya, Pablo & Hachula, Michael & Offermanns, Christian J., 2017. "Spillovers of U.S. unconventional monetary policy to emerging markets: The role of capital flows," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 275-295.
    4. Hwee Kwan Chow & Taojun Xie, 2016. "Are House Prices Driven by Capital Flows? Evidence from Singapore," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-21, February.
    5. Parantap Basu & Shesadri Banerjee, 2015. "Effect of Quantitative Easing on the Indian Economy: A Dynamic Stochastic General Equilibrium Perspective," CEGAP Working Papers 2015_03, Durham University Business School.

    More about this item

    Keywords

    International financial markets; Transmission of monetary policy; International topics;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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