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

Interest Rate Spillovers from the United States: Expectations, Term Premia and Macro-Financial Vulnerabilities

“…Our results suggest that spillovers in such a scenario would be particularly large for EMEs with greater vulnerabilities. More generally, the result that countries with weaker fundamentals are affected most when external conditions change is consistent with some evidence from the taper tantrum (eg Ahmed et al (2017); Mishra et al (2018)). Moreover, the relevance of portfolio equity liabilities is consistent with the result in Kearns et al (2018) on the importance of financial openness for global interest rate spillovers that arise from monetary policy shocks.…”

“…The paper is also related to studies that analyse how macro-financial vulnerabilities in EMEs affect financial market reactions in these economies. A number of papers have examined the experience from the taper tantrum (Ahmed et al (2017); Aizenman et al (2016); Eichengreen and Gupta (2015); Mishra et al (2018)). We contribute to this literature by analysing the role of macro-financial fundamentals in EMEs for the magnitude of interest rate spillovers over a longer sample period.…”

Does the Relative Importance of the Push and Pull Factors of Foreign Capital Flows Vary Across Quantiles?

“…Conditional on episodes of low capital flows, we find that EMs with stronger domestic fundamentals (i.e., higher real GDP growth rate, larger reserve accumulation, better institutional quality, smaller private credit expansion, real exchange rate depreciation, and less public indebtedness) suffer less reduction in foreign flows. Such findings disagree with Eichengreen and Gupta (2015) and Aizenman et al (2016) but support the findings of Ahmed et al (2017) and Mishra et al (2018). Such differences are due to differences in data frequency, dependent variable, definitions of stress episodes, and methodology.…”

“…This issue becomes more complex in extreme episodes (e.g., sudden stops, surges) when capital flows behave differently and have different determinants. The extant literature has investigated (a) the determinants of capital flows using a standard panel data approach (e.g., Ahmed and Zlate, 2014); (b) the factors that explain the occurrence of episodes of extreme capital flows vs. the magnitude of capital flows during extreme episodes (e.g., Forbes and Warnock, 2012;Ghosh et al, 2014;Calderón and Kubota, 2019) using binary outcome panel models; and (c) the determinants of investor differentiation 4 across EMs during financial stress episodes (Eichengreen and Gupta, 2015;Aizenman et al 2016;Ahmed et al, 2017;Mishra et al, 2018) using cross-sectional models.…”

Fed's Policy Changes and Inflation in Emerging Markets: Lessons from the Taper Tantrum

“…As a result, several emerging market economies (EMEs) subsequently experienced sharp capital outflows, an abrupt tightening of financial conditions, and large exchange rate depreciations (see Sahay et al. 2014, Eichengree and Gupta 2015, Aizenman, Binici, and Hutchison 2016, Mishra, Diaye, and Nguyen 2018). This “taper tantrum” is interpreted by many observers as illustrating how monetary policy of advanced countries, in this case the Fed, can exert a strong effect in emerging economies through its effect on global financial conditions.…”