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Tapering talk : the impact of expectations of reduced federal reserve security purchases on emerging markets
 
Author:Eichengreen, Barry; Gupta, Poonam; Collection Title:Policy Research working paper ; no. WPS 6754
Country:World; Date Stored:2014/01/22
Document Date:2014/01/01Document Type:Policy Research Working Paper
SubTopics:Currencies and Exchange Rates; Emerging Markets; Economic Theory & Research; Macroeconomic Management; Debt MarketsLanguage:English
Region:The World RegionReport Number:WPS6754
Volume No:1 of 1  

Summary: 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.

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