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. 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.

Bibliographic Details

Main Authors:	Eichengreen, Barry, Gupta, Poonam
Language:	English en_US
Published:	World Bank, Washington, DC 2014-01
Subjects:	ASSET PRICES, ASSETS, BANK LENDING, BASIS POINTS, BOND SPREAD, BOND SPREADS, BOND YIELDS, BUDGET DEFICIT, BUDGET DEFICITS, BUSINESS ENVIRONMENT, CAPITAL ACCOUNT, CAPITAL ACCOUNT OPENNESS, CAPITAL ACCOUNT TRANSACTIONS, CAPITAL CONTROL, CAPITAL CONTROLS, CAPITAL FLOWS, CAPITAL MARKET, CDS, CENTRAL BANK, CHECKS, CLOSED CAPITAL ACCOUNT, COMPETITIVENESS, CONSUMER PRICE INDEX, CONTROL VARIABLE, CORRELATION COEFFICIENTS, CREDIT DEFAULT, CREDIT DEFAULT SWAP, CREDIT DEFAULT SWAPS, CURRENCY, CURRENCY DEPRECIATION, CURRENT ACCOUNT, CURRENT ACCOUNT BALANCE, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT DEFICITS, CURRENT ACCOUNT TRANSACTIONS, CURRENT ACCOUNTS, CURRENT DEFICIT, DE FACTO EXCHANGE RATE REGIME, DEBTS, DEPENDENT VARIABLE, DEPRECIATIONS, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, ECONOMIC GROWTH, ECONOMIC OUTLOOK, ECONOMIC PERFORMANCE, ECONOMIC POLICY, EMERGING COUNTRIES, EMERGING MARKET, EMERGING MARKETS, EQUITIES, EQUITY PRICE, EQUITY PRICES, EXCHANGE ARRANGEMENTS, EXCHANGE DEPRECIATION, EXCHANGE MARKET, EXCHANGE RATE DATA, EXCHANGE RATE DEPRECIATION, EXCHANGE RATE REGIME, EXCHANGE RATES, EXCHANGE RESTRICTIONS, EXPLANATORY VARIABLES, EXTERNAL DEBT, EXTERNAL FINANCE, EXTERNAL FINANCING, EXTERNAL PRESSURES, FEDERAL RESERVE, FEDERAL RESERVE SYSTEM, FINANCIAL INFLOWS, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL OPENNESS, FINANCIAL SECTOR, FINANCIAL SHOCKS, FINANCIAL SYSTEMS, FISCAL DEFICIT, FISCAL POLICY, FOREIGN ASSETS, FOREIGN CAPITAL, FOREIGN INVESTORS, FOREIGN RESERVES, GDP, GLOBAL FINANCIAL STABILITY, GOVERNANCE INDICATOR, GOVERNANCE INDICATORS, GOVERNMENT BOND, GOVERNMENT BOND MARKETS, GROWTH RATE, GROWTH RATES, IMPORTS, INFLATION, INFLATION INDEX, INFLATION RATE, INTEREST RATE, INTEREST RATE SPREADS, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL STATISTICS, LIABILITY, LIQUID MARKET, LIQUIDITY, LOAN, LOCAL CURRENCY, LOCAL MARKET, LOCAL MARKETS, M2, MACROECONOMIC CONDITIONS, MARKET CONDITIONS, MARKET PRESSURE, MARKET SIZE, MARKET STOCK, MARKET STRUCTURE, MARKET YIELDS, MONETARY FUND, MONETARY POLICY, MORTGAGE, MORTGAGE MARKET, MULTIPLE EXCHANGE RATES, NOMINAL DEPRECIATION, NOMINAL EXCHANGE RATE, OPEN CAPITAL ACCOUNT, PERCEIVED VULNERABILITY, POLICY ANALYSIS, POLICY RESEARCH, PORTFOLIO, PORTFOLIO LIABILITIES, PORTFOLIO LIABILITY, PORTFOLIOS, PRIVATE CAPITAL, PRIVATE CAPITAL INFLOWS, PRIVATE FINANCING, PRIVATE INFLOWS, PUBLIC DEBT, RATE OF DEPRECIATION, RATE OF GROWTH, REAL APPRECIATION, REAL EFFECTIVE EXCHANGE RATES, REAL EXCHANGE, REAL EXCHANGE RATE, REAL EXCHANGE RATE APPRECIATION, REAL EXCHANGE RATES, REAL GDP, REGRESSION ANALYSIS, RESERVE BANK, RESERVES, ROBUSTNESS CHECKS, SECURITIES, SHORT TERM DEBT, SOVEREIGN BOND, SOVEREIGN BONDS, SPECULATIVE ATTACKS, STANDARD DEVIATION, STANDARD DEVIATIONS, STOCK EXCHANGE, STOCK INDEX, STOCK INDICES, STOCK MARKET, STOCK MARKET CAPITALIZATION, STOCK MARKET DECLINE, STOCK MARKET DECLINES, STOCK MARKET INDEX, STOCK MARKET INDICES, STOCK MARKETS, STOCK PRICE, STOCK PRICES, STOCKS, TOTAL EXTERNAL DEBT, TOTAL RESERVES, TREASURIES, UPWARD PRESSURE, WEALTH, WEIGHTS, WORLD DEVELOPMENT INDICATORS,
Online Access:	http://documents.worldbank.org/curated/en/2014/01/18832605/tapering-talk-impact-expectations-reduced-federal-reserve-security-purchases-emerging-markets https://hdl.handle.net/10986/16826
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