The emerging market reaction to Fed tightening

Beniak, Patrycja (2019): The emerging market reaction to Fed tightening.

Abstract

This paper provides one of the first comprehensive assessments of spillovers from 2015-2018 monetary policy tightening phase in the United States to emerging markets, as well as their determinants. It shows that the spillovers were concentrated in the fixed income markets, with a relatively small impact of Fed policy on foreign exchange and stock market price behaviour. The bulk of the impact on fixed income was channeled through rising interest rate expectations rather than an increase in term premia. The decisions on monetary policy tightening in the United States are found to be of less importance for EM pricing than the preceding speeches. The markets were differentiating across individual countries, yet, with exception of the Central and Eastern European economies, based not on macroeconomic fundamentals but the economic policies shaping them. On the top of that, the paper investigates the importance of economic and political risk perception as well as ECB policy for the magnitude of EM spillovers from the Fed tightening, finding both factors irrelevant.

• Item Type: MPRA Paper
• Language: English
• Keywords: unconventional monetary policy, central bank communication, international capital flows, emerging markets, open source software in support of policy analysis
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; F - International Economics > F6 - Economic Impacts of Globalization > F65 - Finance

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