Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets

Eichengreen, Barry and Gupta, Poonam (2014): Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets.

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 differently. We use data for exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. We find 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 did not provide insulation. An 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. We interpret this as investors being able to better rebalance their portfolios when the target country has a relatively large and liquid financial market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Emerging Markets, Tapering, Quantitative Easing
• Subjects: F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission

References

Anwar, Haris and Faseeh Mangi, 2013, “Pakistan Agrees on $5.3 Billion Loan With IMF in Rupee Boost,” Bloomberg News, July 5.

Bloomberg L.P. Database, accessed October 2013.

Chinn, Menzie and Hiro Ito, 2008, "A New Measure of Financial Openness," Journal of Comparative Policy Analysis 10(3):309–322, updated version of dataset.

Eichengreen, Barry, Andrew Rose, Charles Wyplosz, Bernard Dumas and Axel Weber, 1995, “Exchange Market Mayhem: The Antecedents and Aftermath of Speculative Attacks,” Economic Policy 10(21):249–312.

Ghosh, Atish R., Jun Il Kim, Mahvash S. Qureshi, and Juan Zalduendo, 2012, “Surges,” IMF Working Paper WP/12/22.

International Monetary Fund. Annual Report on Exchange Arrangements and Exchange Restrictions. Database, accessed October 2013.

International Monetary Fund, International Financial Statistics, Database accessed October 2013.

International Monetary Fund, Global Financial Stability Report, Database accessed October 2013.

International Monetary Fund, World Economic Outlook, Database accessed October 2013.

Kaufmann, D., A. Kraay, and M. Mastruzzi, 2010, The Worldwide Governance Indicators: Methodology and Analytical Issues.

Philip R. Lane and Gian Maria Milesi-Ferretti, 2007, "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004", Journal of International Economics 73:223-250, updated and extended version of dataset.

World Bank. Doing Business, Database accessed, October 2013.

World Bank, Global Economic Monitor, Database accessed, October 2013.

World Bank, World Development Indicators, Database accessed, October 2013.