What predicts the differential impact of the taper?

by on December 18, 2013 at 10:43 am in Current Affairs, Economics | Permalink

There is a new paper by Eichengreen and Gupta (pdf):

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. We use data for exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. We find 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, 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. We interpret this as investors being able to better rebalance their portfolios when the target country has a relatively large and liquid financial market.

You can think of this as a step in building a new theory of the non-neutrality of money.  The suggestion it seems is that liquidity begets further liquidity, a’ la Matthew.  Here is a related and non-gated FT post about “the fragile five.”

chupa chups December 18, 2013 at 11:26 am

QE equals US budget deficit minus US trade deficit.

Taper impossible.

msgkings December 18, 2013 at 4:46 pm

Oops. Taper just started.

chupa chups December 18, 2013 at 5:28 pm

Nominally, yes.
Next step: Fed wil bring in reverse repos (giving non-primary dealers positive rates on short-
term deposits).

Hadur December 18, 2013 at 11:40 am

If you erroenously clicked on this post looking for Tapir analysis, here is a great blog post on the matter:

dsgntd_plyr December 18, 2013 at 1:09 pm

Minimum wage natural experiment!

“The [DC] council coordinated raising the base wage [to $11.50/hour] with lawmakers in Montgomery and Prince George’s counties, in Washington’s Maryland suburbs. They approved similar measures last month.” http://www.csmonitor.com/layout/set/r14/Business/Latest-News-Wires/2013/1217/Minimum-wage-of-11.50-Washington-DC-to-raise-minimum-wage-in-2016-video

So let’s see what happens relative to Anne Arundel, Fredrick, Charles, Howard and Nova.

PeterN December 18, 2013 at 4:43 pm

If you consolidate the accounts of the treasury and the Fed, there’s no account balance difference among

1) the government issuing debt and the Fed then buying it on the open market

2) the government issuing debt and the Fed then buying it directly (which they are currently prohibited from doing)

3) the government just printing and spending the money

It’s a question of form, custom and popular belief. There is an exception that comes from the Fed being quasi-independent with a particular agenda, but that’s politics, not accounting,

Thus any difference in effect among the 3 has to come from different expectations. It would be a great experiment to try (though perhaps not just now).

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