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Volatility spillovers to the emerging financial markets during taper talk and actual tapering
Authors:Saurabh Ghosh  Mridul Saggar
Affiliation:1. Department of Economic and Policy Research, Reserve Bank of India, Mumbai, India;2. International Department, Reserve Bank of India, Mumbai, India
Abstract:On 22 May 2013, Fed chairman, Ben Bernanke surprised markets by indicating to the media that the US Fed may taper its quantitative easing programme. This set out financial volatility across the globe over the next several months that spilled over to the financial markets of emerging market economies (EMEs). It prompted many EME central banks to take varied policy actions. Looking into this widely known event, this article presents formal empirical evidence establishing that (i) conditional volatility during taper talk exceeded that during actual tapering and (ii) volatility spillovers took place ‘contemporaneously’ from the US markets to the key EMEs during this period. The results suggest importance of careful communications by advanced economy central banks and the possibility of establishing ‘rules of the monetary game’. They also suggest that in the absence of international policy coordination to contain spillovers, EME central banks should build adequate buffers and reinforce financial stability ahead of the reversal of the global interest rate cycle.
Keywords:Volatility  spillover  multivariate GARCH  quantitative easing  tapering  EMEs
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