Tapering Talk : The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets
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. Th...
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2014/01/18832605/tapering-talk-impact-expectations-reduced-federal-reserve-security-purchases-emerging-markets http://hdl.handle.net/10986/16826 |
| Summary: | 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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