Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets |
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| Institution: | 1. Cornell S.C. Johnson College of Business, Cornell University, USA;2. Judge Business School, Cambridge University, UK;1. Central Bank of Chile, Santiago 8340454, Chile;2. Smeal College of Business, Pennsylvania State University, University Park, PA 16802, USA;3. Instituto de Econom?a, Pontificia Universidad Católica de Chile, Santiago 7820436, Chile;4. Pompeu Fabra University, Barcelona 08005, Spain |
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| Abstract: | In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This “tapering talk” had a large negative impact on the exchange rate and financial markets in emerging markets. In this paper, we analyze who was hit and why. We find that countries with larger and more liquid markets and larger inflows of capital in prior years experienced more pressure on their exchange rate, foreign reserves, and equity prices. We interpret this as investors being able to rebalance their portfolios more easily when the target country has a large and liquid financial market. |
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