The Transmission of Federal Reserve Tapering News to Emerging Financial Markets

Abstract

This paper evaluates the impact of tapering "news" announcements by Fed senior policy makers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging market asset prices respond most to statements by Fed Chairman Bernanke, and much less to other Fed officials. We group emerging markets into those with "robust" fundamentals (current account surpluses, high international reserves and low external debt) and those with "fragile" fundamentals and, intriguingly, find that the exchange rates of the robust group (and lesser extend equity prices and CDS spreads) were more adversely affected to tapering news than the fragile group. The cumulative effects of tapering announcements after a month, however, appear to be quite similar for both robust and fragile emerging markets. We also show that more financially developed economies are more impacted by tapering news and a plausible interpretation is that more financially developed economies are more exposed, at least in the short-term, to external news announcements.

Advanced‐country policies and emerging‐market currencies: The impact of US tapering on India's rupee

“…And it holds when we run the KPSS test with the null hypothesis that the series is trend-stationary, with a reasonable number of lags (up to 12 for the exchange rate, Indian WPI, and Indian IIP, four lags for US PPI and nine lags for the US = IIP). Aizenman et al, 2014) have used daily observations to isolate the tapering shock even more precisely. 4 Durbin-Watson d = 0.28, Breusch-Godfrey χ 2 = 93.63 [p = 0.00].…”

“…3 With just one lag, which is the lag length suggested by SBIC, there is at most one cointegrating vector. Aizenman et al (2014) enrich the analysis by adding interactions between the announcement and pre-announcement levels of the current account deficit, reserves, external debt, etc. 5 The estimates are robust to including higher-order AR disturbances, but parameter estimates on orders higher than AR(2) were never statistically significant.…”

“…Others have been considered by the empirical literature on the episode (Aizenman & Binici, 2016;Aizenman, Binici, & Hutchison, 2014;Basu et al, 2014;Eichengreen & Gupta, 2015;Lim, Mohapatra, & Stocker, 2014;Rai & Suchanek, 2014). Several channels and mechanisms may account for short-term depreciation above and beyond the impact of changes in long-term fundamentals.…”

A Survey of the International Evidence and Lessons Learned About Unconventional Monetary Policies: Is a ‘New Normal’ in Our Future?

“…Both positive (appreciation) and negative (depreciation) effects on the exchange rates of domestic currencies in EMEs have been identified. The evidence suggests that the Fed's so‐called ‘taper tantrum’ in the second and third quarters of 2013 caused a depreciation in the currencies of EMEs (Mishra et al ., ; Eichengreen and Gupta, ; Aizenman et al ., ). In contrast, as also shown in Figure , the impact on sovereign bond yields was relatively more consistent in that UMP in AEs lowered yields in EMEs.…”

Development and Functioning of FX Markets in Asia and the Pacific

“…Another period of volatility in FX markets followed heightened expectations of changes to US monetary policy in 2013 and early 2014. In particular, big depreciations in a large number of emerging market currencies were associated with tapering announcements by Federal Reserve Chair Bernanke (Aizenman et al., ). The impact of the tapering news differed according to country fundamentals, but in a manner different from that noted for the GFC: i.e., the currencies of countries with current account surpluses, high international reserves and low debt burdens depreciated more than other currencies.…”