Working Paper: NBER ID: w19980
Authors: Joshua Aizenman; Mahir Binici; Michael M. Hutchison
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.
Keywords: Federal Reserve; Tapering; Emerging Markets; Financial Markets; Asset Prices
JEL Codes: F3; F36; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rates (F31) | asset prices (G19) |
| Bernanke's statements (E58) | emerging market asset prices (G15) |
| Bernanke's statements (E58) | exchange rates (F31) |
| Bernanke's statements (E58) | exchange rates of robust countries (F31) |
| robust fundamentals (E32) | exchange rates depreciation (F31) |
| cumulative effects (C22) | exchange rates of robust and fragile markets (F31) |
| tapering news (E60) | sensitivity of financially developed economies (F65) |