What predicts the differential impact of the taper?

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.”


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