The transmission of Federal Reserve tapering news to emerging … · 2016-06-01 · rupted...
Transcript of The transmission of Federal Reserve tapering news to emerging … · 2016-06-01 · rupted...
The Transmission of Federal ReserveTapering News to Emerging Financial
Markets∗
Joshua Aizenman,a Mahir Binici,b and Michael M. Hutchisonc
aUniversity of Southern California and NBERbCentral Bank of Turkey
cUniversity of California, Santa Cruz
This paper evaluates the impact of tapering “news”announcements by Federal Reserve senior policymakers onfinancial markets in emerging economies. We apply a panelframework using daily data, and find that emerging-marketasset prices respond most to statements by Federal ReserveChairman Bernanke, and much less to other Federal Reserveofficials. We group emerging markets into those with “robust”fundamentals (current account surpluses, high internationalreserves, and low external debt) and those with “fragile” fun-damentals and, intriguingly, find that the exchange rates of therobust group (and, to a lesser extent, equity prices and CDSspreads) were more adversely affected by tapering news thanthe fragile group. The cumulative effects of tapering announce-ments after a month, however, appear to be quite similar forboth robust and fragile emerging markets.
We also show that more financially developed economies aremore affected by tapering news, and a plausible interpretationis that more financially developed economies are more exposed,at least in the short term, to external news announcements.
JEL Codes: F3, F36, G14.
∗We thank the editor of this journal and three anonymous referees forvery helpful suggestions on an earlier draft of this paper. Author e-mails:[email protected]; [email protected]; and [email protected].
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318 International Journal of Central Banking June 2016
1. Introduction
The quantitative easing (QE) policies of the U.S. Federal Reservein the years following the crisis of 2008–9 included monthly secu-rities purchases of long-term Treasury bonds and mortgage-backedsecurities totaling $85 billion in 2013. The cumulative outcome ofthese policies has been the unprecedented increase of the monetarybase, mitigating the deflationary pressure of the crisis. The resul-tant lower interest rates and flattened yield curve improved finan-cial conditions and helped stimulate real economic activity, yet theQE policy raised pertinent questions regarding the timing and thenature of the exit strategy (Williams 2011, 2012). These issues cameto the fore in 2013, with vigorous and intensifying debate amongpolicymakers and market participants about the exit strategy fromthe massive monetary stimulus. The growing frequency of publicstatements by the Federal Reserve’s governors and presidents, com-bined with occasional press releases, have been the focus of thefinancial media, changing expectations and moving market prices.This process culminated on December 18, 2013, when the FederalReserve decided at the Federal Open Market Committee (FOMC)meeting (as announced in the public statement) to taper its quanti-tative easing policy by $10 billion per month, to $75 billion. Chair-man Bernanke also projected the program to wind down steadilythrough 2014 and conclude by year-end, assuming the economyremained healthy. Subsequent announcements gave news of a grad-ually reduced QE, and the pattern continued after the appointmentof Chair Yellen.
An important feature of quantitative easing and unprecedent-edly low U.S. interest rates is that it led to large short-term capitalinflows to a number of emerging markets, which in turn led severalto impose capital controls, such as Brazil, Indonesia, South Korea,and others (Ahmed and Zlate 2013). Quantitative easing led the U.S.dollar to be the funding currency in large-scale carry-trade activitywith emerging markets as the target currencies. The concern withtapering is the flip side: potentially disruptive large-scale capitaloutflows from emerging markets as carry-trade activity is unwoundin expectation of tapering (and, eventually, reduction in the FederalReserve balance sheet through sales of assets, not just reduction inthe pace of purchases) and hints at future interest rate increases.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 319
Large capital outflows could create disruptions in financial marketsand eventually real economic activity in emerging markets.
This paper evaluates whether tapering announcements have dis-rupted financial markets in emerging economies. We investigate theimpact of tapering “news” announcements by Federal Reserve seniorpolicymakers on financial asset prices in emerging markets. Theemerging markets’ financial asset prices of interest are national stockmarkets, exchange rates, and credit default swaps (CDS) spreads.These reflect a broad spectrum of the potential effects of tapering,where we would expect greater likelihood of tapering, and hence cap-ital outflows, from emerging markets, to cause a fall in equity mar-kets, depreciation of exchange rates, and an increase in CDS spreads(reflecting greater uncertainty and risk in sovereign bond markets).In terms of Federal Reserve “news,” we focus on statements fromFederal Reserve Chairman Bernanke, Federal Reserve Board gover-nors, and Federal Reserve Bank presidents, as well as FOMC state-ments and minutes. Our presumption is that it is important to dif-ferentiate between announcements/statements by the Chair, who isthe public face and most important Federal Reserve policymaker,and other Federal Reserve policymakers (governors and presidents).
We employ daily data during November 2012 and October 2013.Statements about the likelihood of future tapering, or scaling backthe large-scale asset purchase program (LSAP), began to emerge inlate 2012, marking the beginning of our sample period. However,during this period there were also frequent and forceful statementsby Federal Reserve officials about the need to continue quantita-tive easing, so these statements were also included as “news” inour investigation both to address issues of symmetry and to judgemarket impacts.
The methodology of the paper is a quasi-event study, akin toDooley and Hutchison (2009), tracing the impact of evolving nar-rative about the expectation of future tapering, as revealed to thepublic through the news media, on key emerging-market prices. Weuse a panel fixed-effect framework using daily data with a varietyof models to evaluate the impact of “news” on the three assetsprices (stock market, exchange rate, and CDS spreads). Moreover,we explore whether market responses to tapering “news” are differ-ent across emerging markets, perhaps differentiated by the relativestrength of their economic fundamentals. In particular, we exploit
320 International Journal of Central Banking June 2016
the heterogeneity among the emerging markets, evaluating the asso-ciation between asset price movements and key characteristics asso-ciated with “fragility” or “robustness” of a country, where thesecharacteristics are defined by their current account, internationalreserve, and foreign indebtedness positions.
Previewing results, we find that emerging-market asset pricesrespond most to statements by Federal Reserve Chairman Bernanke,and much less to the frequent, divergent, and sometimes inconsistentstatements by other Federal Reserve officials. This finding is consis-tent with the power of the Chairman to set and affect the agenda,and with the advantage of more frugal and clear communication. Wegroup emerging markets into those with “robust” fundamentals (tencountries) and those with “fragile” fundamentals (sixteen countries)and, intriguingly, find that stronger countries, on average, were gen-erally more adversely exposed in the short run to tapering news thanthe countries with weak fundamentals, especially in the deprecia-tion of their currencies. In particular, the exchange rate depreciatedin both groups immediately following tapering news from Chair-man Bernanke, yet the depreciations of the stronger group werethree times as large as the weaker group. Looking at these linkagesin detail, we find that higher current account balances, higher for-eign exchange rate reserves, and lower external debt are associatedwith greater exchange rate depreciation following Bernanke taper-ing announcements. Over the period of a month, however, we findasset price movements to tapering announcements are quite similarfor both the fragile and robust groups. Finally, we find that morefinancially developed emerging markets were also more affected byBernanke tapering announcements.
A possible interpretation of these findings is that countrieswith weaker fundamentals and less financial development were lessexposed to the inflows triggered by quantitative easing, and exchangerates responded less, in line with the conjecture that being closer tofinancial autarky provides deeper insulation from financial news. Theflip side is that tapering news had less impact on exchange rates inthese countries. Yet, these findings are also consistent with a less san-guine interpretation, reflecting financial markets’ initial inattentionto tail risks, overlooking the vulnerability of the weaker emergingmarkets to the adverse implications of higher future global interestrates. Indeed, in the last quarter of 2013, financial markets refocused
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 321
attention on the fragile emerging markets, with depressed financialasset prices of the “Fragile Five”—Brazil, India, Indonesia, SouthAfrica, and Turkey—a subgroup of the weaker emerging markets.1
Interestingly, however, it appears that differential responses betweenthe fragile and robust group tend to dissipate over time.
The methodology of our paper complements Eichengreen andGupta (2014), who used data for exchange rates, foreign reserves,and equity prices between April and August 2013 to analyze whowas hit and why. They concluded that better fundamentals did notprovide insulation. Instead, countries with larger markets experi-enced more pressure on the exchange rate, foreign reserves, andequity prices. Our focus on the event methodology allows us to tracethe immediate impact effect of the coming news on expectation ofadjustment, as reflected in the changes of key prices triggered by thenews.
The next section presents the data and methodology of the study.Section 3 presents the main results. Section 4 presents extensions androbustness checks of the basic models. Section 5 concludes.
2. Data and Methodology
2.1 Data
Our objective is to evaluate the transmission of U.S. tapering “news”to financial markets in emerging markets. In undertaking this analy-sis, we consider announcements associated with support (or actions)of quantitative easing as well as tapering. During the period oftime under investigation—November 27, 2012 through October 3,2013—there were numerous statements in support of both policiesby Chairman Bernanke, Federal Reserve governors, Federal ReserveBank presidents, and the FOMC statement following meetings, aswell as FOMC minutes from past meetings. This allows us to evalu-ate the symmetry of the effects of the announcements, not only forQE and tapering but also for different sources of the statements. In
1The market inattention to tail risks was vividly illustrated by the euro cri-sis, where the pre-crisis sovereign spreads of Greece, Portugal, and Spain werecomparable to that of Germany and other euro-zone core countries (Aizenman,Hutchison, and Jinjarak 2013). See also Aizenman, Binici, and Hutchison (2013)for an overview of other issues in the pricing of risk during the euro crisis.
322 International Journal of Central Banking June 2016
particular, we focus on six types of announcements from the Fed-eral Reserve: statements by Federal Reserve Chairman Bernanke,either in support of further quantitative easing (QE) or tapering(Tap); release of statements following the FOMC meetings eithersupporting further QE or Tap; and statements by governors of theFederal Reserve System (other than Bernanke) or by presidents ofthe Federal Reserve Banks either supporting QE or Tap.
To gather this information, we conducted two sets of newssearches on Bloomberg. The first search was for the keywords “QEFederal.” Additionally, to focus on the tapering aspect of the QEannouncements, another search was performed for the keywords“Federal Reserve Bank of,” “QE,” and “Fed Taper.” A filter wasapplied to select “News” for both searches. To verify whether theannouncement and speech “news” were coded consistently with howthey were perceived by the markets in the United States (not emerg-ing markets), we examined articles and other publications from theFactiva database. We utilized the date and topic filtering availablein the database to solicit descriptions of the perception as well asthe corresponding market reactions of the announcement/speech.We closely examined each of the original Bloomberg coding forannouncements to determine whether they matched the perceptionsfound in the Factiva publications. There were many more announce-ments/statements/speeches on these topics than were coded. Inorder to be coded as either supporting further (or continuing) QEor tapering, the announcements needed to be unambiguous.
Table 1 presents some summary statistics on our announce-ments as well as examples of announcement coding and the divisionbetween “tapering” and “quantitative easing.” We found three cases(seven cases) where Chairman Bernanke clearly indicated taperingwas a favored policy option (further or continuing QE was a favoredpolicy option); five cases where the FOMC statements/minutesclearly favored QE (and none clearly favored tapering); and a roughbalance between governors/presidents speaking unambiguously infavor of QE (twenty-two cases) or tapering (twenty-six cases).
We consider three main conduits through which these variablesmay affect emerging markets: daily changes in national stock mar-kets (log first differences), daily changes in foreign exchange rates(log first differences), and daily changes in CDS spreads (in basispoints). If tapering is expected to reduce financial flows to emerging
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 323Tab
le1.
Num
ber
and
Exam
ple
sof
Tap
eran
dQ
E“N
ews”
Eve
nts
(Nov
ember
27,20
12–O
ctob
er3,
2013
)
Sou
rce
ofEve
nts
Chai
rman
Ber
nan
keG
over
nor
/Pre
siden
tFO
MC
Agg
rega
te
Tap
erin
gQ
ETap
erin
gQ
ETap
erin
gQ
ETap
erin
gQ
E
No.
ofE
vent
s3
726
220
529
33
Exa
mpl
esof
Ann
ounc
emen
ts(C
ongr
essi
onal
Tes
tim
ony,
Spee
ches
,FO
MC
Stat
emen
ts,et
c.)
Ben
Tap
(Ber
nank
eTap
erin
g)M
ay22
,201
3:B
erna
nke
said
the
Fede
ralR
eser
veco
uld
“tak
ea
step
dow
nin
our
pace
ofpu
rcha
ses”
inth
e“n
ext
few
mee
ting
s”in
test
imon
yto
the
Join
tE
cono
mic
Com
mit
tee
ofC
ongr
ess.
Ben
QE
(Ber
nank
eQ
uant
itat
ive
Eas
ing)
Janu
ary
24,20
13Tes
tim
ony
toSe
nate
Ban
king
Com
mit
tee:
“We
dono
tse
eth
epo
tent
ialco
sts
ofth
ein
crea
sed
risk
-tak
ing
inso
me
finan
cial
mar
kets
asou
twei
ghin
gth
ebe
nefit
sof
prom
otin
ga
stro
nger
econ
omic
reco
very
.In
flati
onis
curr
entl
ysu
bdue
d,an
din
flati
onex
pect
atio
nsap
pear
wel
lan
chor
ed.”
Ber
nank
eus
edhi
ste
stim
ony
topu
shba
ckag
ains
tco
lleag
ues
onth
eFO
MC
who
favo
red
curt
ailin
gth
e$8
5bi
llion
inm
onth
lybo
ndbu
ying
.G
ov/P
res
Tap
(Fed
eral
Res
erve
Gov
erno
ror
Fede
ralR
eser
veB
oard
Pre
side
ntTap
erin
g)
June
3,20
13:Fe
dera
lR
eser
veB
ank
ofSa
nFr
anci
sco
Pre
side
ntJo
hnW
illia
ms
said
polic
ymak
ers
may
star
tre
duci
ngth
epa
ceof
bond
purc
hase
sov
erth
ene
xtth
ree
mon
ths
and
pote
ntia
llyen
dqu
anti
tati
veea
sing
byye
ar-e
nd.H
esa
idth
atw
ith
cont
inue
d“g
ood
sign
s”on
jobs
and
confi
denc
ein
a“s
ubst
anti
alim
prov
emen
t”he
coul
dse
eas
“ear
lyas
this
sum
mer
som
ead
just
men
t,m
aybe
mod
est
adju
stm
ent
dow
nwar
d,in
our
purc
hase
prog
ram
.”(c
ontinu
ed)
324 International Journal of Central Banking June 2016
Tab
le1.
(Con
tinued
)
Sou
rce
ofEve
nts
Chai
rman
Ber
nan
keG
over
nor
/Pre
siden
tFO
MC
Agg
rega
te
Tap
erin
gQ
ETap
erin
gQ
ETap
erin
gQ
ETap
erin
gQ
E
No.
ofE
vent
s3
726
220
529
33
Exa
mpl
esof
Ann
ounc
emen
ts(C
ongr
essi
onal
Tes
tim
ony,
Spee
ches
,FO
MC
Stat
emen
ts,et
c.)
Gov
/Pre
sQ
E(F
eder
alR
eser
veG
over
nor
orFe
dera
lR
eser
veB
oard
Pre
side
ntQ
uant
itat
ive
Eas
ing)
Mar
ch27
,20
13:T
wo
regi
onal
Fede
ralR
eser
vepr
esid
ents
said
they
wan
tth
eFe
dera
lR
eser
veto
keep
buyi
ngbo
nds
thro
ugh
the
end
of20
13,w
hile
ath
ird
offici
alsa
idth
ece
ntra
lba
nkis
n’t
doin
gen
ough
tosp
urec
onom
icgr
owth
.“W
esh
ould
cont
inue
our
larg
e-sc
ale
asse
tpu
rcha
ses
ofTre
asur
yan
dm
ortg
age-
back
edse
curi
ties
thro
ugh
this
year
—al
thou
ghth
eam
ount
may
need
tobe
adju
sted
upor
dow
n,de
pend
ing
onho
wth
eec
onom
icsi
tuat
ion
evol
ves,
”Fe
dera
lR
eser
veB
ank
ofB
osto
nP
resi
dent
Eri
cR
osen
gren
said
ina
spee
chin
Man
ches
ter,
New
Ham
pshi
re.“T
his
isa
poin
tw
hen
we
have
tobe
pati
ent
and
let
our
polic
ies
wor
k,”
wit
hst
imul
us“fi
ring
onal
lcy
linde
rs,”
Fede
ralR
eser
veB
ank
ofC
hica
goP
resi
dent
Cha
rles
Eva
nssa
idto
repo
rter
s.FO
MC
QE
(FO
MC
Qua
ntit
ativ
eE
asin
g)M
ay1,
2013
FO
MC
Mee
ting
Stat
emen
t:T
heFe
dera
lR
eser
vesa
idit
will
keep
buyi
ngbo
nds
ata
mon
thly
pace
of$8
5bi
llion
whi
lest
andi
ngre
ady
tora
ise
orlo
wer
purc
hase
sas
econ
omic
cond
itio
nsev
olve
.T
hepu
rcha
ses
will
rem
ain
divi
ded
betw
een
$40
billi
ona
mon
thof
mor
tgag
e-ba
cked
secu
riti
esan
d$4
5bi
llion
am
onth
ofTre
asur
yse
curi
ties
.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 325
markets, then we would expect national equity markets to fall,exchange rates to depreciate, and (perhaps) CDS spreads to rise.We focus on twenty-six emerging markets, shown in table 2. (The“fragile” and “robust” groups and statistics are explained below.)Emerging markets were required to have stock market and CDSprice data for the entire sample period to be included in the sample.
2.2 Methodology
We employ panel fixed-effect estimation techniques to estimate theimpact of U.S. Federal Reserve announcements on financial marketprices in emerging markets. We estimate a panel data model of thefollowing form:
ΔPit = β0 + β1Ben Tapt + β2Ben QEt + β3GovPres Tapt
+ β4GovPres QEt + β5FOMC QEt + μi + εit, (1)
where ΔPit is the log first difference in foreign exchange rates,national equity markets, or the change in CDS spread for countryi at time t. Ben Tapt (Ben QEt) are statements supporting taper-ing (further quantitative easing) by Chairman Bernanke at time t;GovPres Tapt (GovPres QEt) are statements by Federal ReserveBoard governors or Federal Reserve Bank presidents in support oftapering (further quantitative easing); and FOMC QEt are officialstatements following FOMC meetings supporting further quantita-tive easing. (No official FOMC statements supporting tapering wereidentified during this sample period.)
We find no evidence of dynamic adjustment in asset price move-ments (log first differences in equity markets and exchange rates, firstdifferences in CDS spreads) and considered all news events emanat-ing from the United States as strictly exogenous for emerging mar-kets. We therefore estimate the model as a static panel with countryfixed effects. We report robust standard errors clustered with coun-tries, and do not find any evidence of serial correlation in residuals.To take time differences between U.S. and Asian markets countriesinto account, all Federal Reserve announcements (independent vari-ables) are lagged one day for South Korea, Malaysia, Philippines,Thailand, China, Indonesia, India, and Pakistan. For the rest of thecountries, news events are entered in the model contemporaneously.
326 International Journal of Central Banking June 2016
Table 2. Emerging-Market Sample
CAB/GDP Reserves/ ExternalCountry (%) GDP (%) Debt/GDP (%)
Robust Group
Peru −4.89 31.11 25.72Israel 2.33 28.68 37.00Korea 4.61 26.86 37.74Malaysia 3.49 43.11 32.87Philippines 2.51 27.04 30.34Thailand 0.11 41.09 37.04Bulgaria 1.15 32.66 72.56Russia 2.89 22.44 31.56China 2.50 39.32 8.99Hungary 2.22 34.22 136.53
Fragile Group
Turkey −7.38 12.85 43.30South Africa −6.07 11.82 34.40Argentina −0.75 7.13 24.25Brazil −3.38 16.75 19.74Chile −4.58 14.55 42.61Colombia −3.22 10.82 22.18Mexico −1.34 12.37 29.90India −4.41 15.02 20.85Indonesia −3.41 12.55 25.86Pakistan −0.97 3.10 24.49Ukraine −7.29 12.37 78.49Czech R. −1.76 21.75 52.33Latvia −1.14 23.82 140.82Lithuania −0.26 15.15 79.00Poland −3.03 20.03 75.37Romania −1.96 22.95 77.38
Notes: Current account balance (in percent of GDP) and international reserves (inpercent of GDP) data is taken from the International Monetary Fund’s World Eco-nomic Outlook Database, and external debt (in percent of GDP) is from the CentralIntelligence Agency’s World Factbook. A country is grouped under “robust” or “frag-ile” based on whether it has current account surplus, high reserves, and low externaldebt. Thus, if at least two of three (or three of three) of the above criteria holds,then a country is in the “robust group”; otherwise, it is in the “fragile group.” Lowinternational reserve level is defined as a reserves/GDP ratio below 20 percent, andlow external debt is defined as an external debt/GDP ratio less than 34 percent.Both cut-off points are the median values of their respective samples.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 327
Recognizing the substantial heterogeneity among the twenty-sixemerging markets, we grouped the emerging markets according tothree fragility/strength criteria: current account deficits or surpluses;low or high international reserves; and high or low external debts.2
We estimated the effects of “news” on the full sample as well as thetwo subgroups (“robust” and “fragile”). We also grouped countriesby their level of financial development (“low” or “high”). As dis-cussed in the introduction, we anticipate different reactions to newsdepending on the state of the emerging-market economy.
3. Results
3.1 Full-Sample Results
Table 3 reports the impact of the tapering and QE news on thestock market indices, exchange rates, and sovereign spreads for thefull sample of twenty-six emerging markets from November 27, 2012to October 3, 2013. These regression results summarize the changeof market prices in the twenty-four-hour window following the news.
Tapering. Bernanke’s tapering news was associated with signif-icant drops in stock market indices and exchange rate depreciations,but had no significant impact on sovereign spreads. This may reflectthe expectation of reduced capital inflows and carry-trade activ-ity to emerging markets, with less investment in equity markets.Not surprisingly, tapering news doesn’t seem to affect CDS spreadson sovereign debt. By contrast, numerous and frequently quite vig-orous statements in support of tapering by Federal Reserve Bankpresidents had little discernible effect on emerging-market financialprices—equities, exchange rates, or CDS spreads—during our sampleperiod. (No tapering news was attributable to Federal Reserve gover-nors during this period, only Federal Reserve Bank presidents.) Thismay be because one of the Federal Reserve Bank presidents—Fisherof the Federal Reserve Bank of Dallas—made many public state-ments advocating tapering (nine of our twenty-six events) that mayhave been discounted by financial markets due to their frequency and
2Low international reserve level is defined as a reserves/GDP ratio below 20percent, and low external debt is defined as an external debt/GDP ratio less than34 percent. Both cut-off points are the median values of their respective samples.
328 International Journal of Central Banking June 2016
Table 3. Full Sample—Asset Market Reactionto Federal Reserve Announcements
Stock Market Exchange Rate CDS Spreads(1) (2) (3)
Ben Tap −0.328∗ 0.219∗∗∗ −0.550(0.164) (0.064) (4.075)
Ben QE 0.128 −0.141∗∗∗ −1.419(0.128) (0.037) (1.122)
Gov/Pres Tap 0.035 −0.010 0.564(0.043) (0.012) (0.717)
Gov/Pres QE −0.176∗∗∗ −0.097∗∗∗ −3.689(0.052) (0.018) (4.417)
FOMC QE 0.164∗∗ −0.252∗∗∗ −3.535∗
(0.079) (0.045) (1.936)Constant 0.047∗∗∗ 0.033∗∗∗ 0.421
(0.009) (0.004) (0.497)Observations 5,590 5,375 5,156R-squared 0.004 0.012 0.001No. of Countries 26 25 24
Notes: The table presents panel fixed-effect estimation results with robust standarderrors in parentheses. ***, **, and * denote p < 0.01, p < 0.05, and p < 0.1, respec-tively. Independent variables are log first difference of stock market index, foreignexchange rate, and change in CDS spreads in specification 1, 2, and 3, respectively.Exchange rate estimation excludes China; CDS spread estimation excludes Chinaand Pakistan.
predictability of the message. (The other most vocal advocate fortapering was Philadelphia Federal Reserve Bank President Plosser,with five news events during the sample period.) No explicit andunambiguous news in support of tapering in FOMC announcementswas coded during this period.
Quantitative Easing. Bernanke’s QE news, symmetrically,was associated with strong exchange rate appreciation in table 3.Exchange rates also significantly appreciated in response to QEnews contained in FOMC statements and in announcements by gov-ernors/presidents, where the FOMC had the largest impact andgovernors/presidents had the least impact. The support for QEwas broader than tapering, including governors (Vice Chair Yellenand Governors Duke and Stein) and many presidents. President
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 329
Rosengren (Boston) and President Bullard (St. Louis) spoke themost frequently (four times each) in support of continuing QE. Inaddition, consistent with the very strong impact of FOMC QE newsexchange rate appreciation, these statements also had a large impacton pushing up stock market prices.
3.2 Differential Effects of Tapering
As discussed above, we expect tapering news to have different effectsdepending on the strength of a country’s international “fundamen-tals.” Full-sample results, in turn, could mask differential effects dueto group heterogeneity associated with disparate fundamentals. Toaddress this issue, tables 4–6 report the impact of the tapering andQE news on market prices, allowing comparison between countrieshaving current account deficits/surpluses (table 4), low/high inter-national reserves (table 5), and high/low external debts (table 6).(Table 2 presents the external positions of countries and the groupingbetween “robust” and “fragile” countries.) We also group countriesin terms of these fundamentals, robust and fragile, where the robustgroup are countries that meet at least two “strong” criteria (cur-rent account surplus, higher reserves, and low debt), and the fragilegroup meet at least two “weak” criteria (current account deficits,low reserves, and high debt). The countries in each group are shownin table 2, and table 7 reports the regression results for these twogroups.
This comparison reveals asymmetric and divergent patterns,depending on whether the news is emanating from Bernanke’s state-ments, as opposed to governors/presidents and the FOMC, andbetween the groups with robustness or fragile fundamentals. In par-ticular, Bernanke’s tapering news had much larger exchange ratedepreciation effects on countries with (i) current account surpluses asopposed to deficits (four times larger, table 4), (ii) high internationalreserves contrasted with low reserves (three times larger, table 5),and (iii) low external debt rather than high debt (about half as muchlarger, table 6).3 The analysis of the two groups—fragile or robust,
3The differences between the groups are statistically significant in the casesof exchange rates (chi-square of 4.56 and probability of 0.033) and internationalreserves.
330 International Journal of Central Banking June 2016
Tab
le4.
Diff
eren
tial
Effec
ts—
Curr
ent
Acc
ount
Defi
cit
and
Surp
lus
Cou
ntr
ies
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
CA
CA
CA
CA
CA
CA
Defi
cit
Surp
lus
Defi
cit
Surp
lus
Defi
cit
Surp
lus
(1a)
(1b)
(2a)
(2b)
(3a)
(3b)
Ben
Tap
−0.
229
−0.
516
0.11
4∗0.
441∗
∗−
2.76
73.
877∗
∗
(0.1
98)
(0.2
95)
(0.0
56)
(0.1
36)
(6.0
41)
(1.5
59)
Ben
QE
0.20
3∗∗
−0.
013
−0.
129∗
∗∗−
0.16
7∗−
2.30
00.
321
(0.0
79)
(0.3
42)
(0.0
39)
(0.0
86)
(1.6
51)
(0.3
40)
Gov
/Pre
sTap
−0.
001
0.10
3−
0.01
70.
002
1.05
4−
0.42
8(0
.060
)(0
.088
)(0
.016
)(0
.018
)(1
.052
)(0
.264
)G
ov/P
res
QE
−0.
152∗
−0.
222∗
∗∗−
0.10
8∗∗∗
−0.
073∗
∗∗−
5.96
40.
968∗
∗
(0.0
72)
(0.0
65)
(0.0
25)
(0.0
19)
(6.5
52)
(0.3
28)
FO
MC
QE
0.22
3∗∗
0.05
0−
0.24
7∗∗∗
−0.
264∗
∗∗−
4.69
3−
1.13
1(0
.101
)(0
.123
)(0
.064
)(0
.045
)(2
.820
)(0
.836
)C
onst
ant
0.04
7∗∗∗
0.04
7∗∗∗
0.04
2∗∗∗
0.01
40.
678
−0.
102∗
(0.0
12)
(0.0
12)
(0.0
05)
(0.0
08)
(0.7
39)
(0.0
50)
Obs
erva
tion
s3,
679
1,91
13,
679
1,69
63,
460
1,69
6R
-squ
ared
0.00
40.
006
0.00
90.
024
0.00
20.
014
No.
ofC
ount
ries
189
188
178
Note
s:T
heta
ble
pres
ents
pane
lfix
ed-e
ffec
tes
tim
atio
nre
sult
sw
ith
robu
stst
anda
rder
rors
inpa
rent
hese
s.**
*,**
,an
d*
deno
tep
<0.
01,p
<0.
05,an
dp
<0.
1,re
spec
tive
ly.In
depen
dent
vari
able
sar
elo
gfir
stdi
ffer
ence
ofst
ock
mar
ket
inde
x,fo
reig
nex
chan
gera
te,
and
chan
gein
CD
Ssp
read
sin
spec
ifica
tion
1,2,
and
3,re
spec
tive
ly.
Exc
hang
era
tees
tim
atio
nex
clud
esC
hina
;C
DS
spre
ades
tim
atio
nex
clud
esC
hina
and
Pak
ista
n.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 331
Tab
le5.
Diff
eren
tial
Effec
ts—
Inte
rnat
ional
Res
erve
s:Low
-an
dH
igh-R
eser
veC
ountr
ies
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
Low
Hig
hLow
Hig
hLow
Hig
hR
eser
ves
Res
erve
sR
eser
ves
Res
erve
sR
eser
ves
Res
erve
s(1
a)(1
b)
(2a)
(2b)
(3a)
(3b)
Ben
Tap
−0.
344
−0.
314
0.12
20.
308∗
∗∗−
4.94
53.
166∗
∗∗
(0.2
73)
(0.2
04)
(0.0
78)
(0.0
97)
(8.8
56)
(1.0
12)
Ben
QE
0.23
8∗∗
0.03
5−
0.08
0∗−
0.19
7∗∗∗
−2.
699
−0.
341
(0.1
07)
(0.2
20)
(0.0
44)
(0.0
56)
(2.4
19)
(0.3
75)
Gov
/Pre
sTap
−0.
017
0.08
0−
0.03
00.
007
1.67
5−
0.37
3∗
(0.0
68)
(0.0
54)
(0.0
21)
(0.0
13)
(1.5
21)
(0.1
74)
Gov
/Pre
sQ
E−
0.21
0∗−
0.14
6∗∗
−0.
112∗
∗∗−
0.08
3∗∗∗
−8.
914
0.75
4∗∗∗
(0.0
97)
(0.0
52)
(0.0
34)
(0.0
15)
(9.6
08)
(0.2
19)
FO
MC
QE
0.25
1∗0.
090
−0.
230∗
∗−
0.27
3∗∗∗
−6.
822
−0.
755
(0.1
34)
(0.0
91)
(0.0
90)
(0.0
32)
(4.0
54)
(0.5
36)
Con
stan
t0.
062∗
∗∗0.
034∗
∗∗0.
056∗
∗∗0.
013∗
∗0.
998
−0.
067∗
(0.0
14)
(0.0
11)
(0.0
06)
(0.0
05)
(1.0
88)
(0.0
34)
Obs
erva
tion
s2,
580
3,01
02,
580
2,79
52,
361
2,79
5R
-squ
ared
0.00
60.
003
0.00
80.
019
0.00
20.
011
No.
ofC
ount
ries
1214
1213
1113
Note
s:Se
eno
tes
tota
ble
4.
332 International Journal of Central Banking June 2016
Tab
le6.
Diff
eren
tial
Effec
ts—
Inte
rnat
ional
Deb
tLev
els:
Hig
h-
and
Low
-Deb
tC
ountr
ies
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
Hig
hLow
Hig
hLow
Hig
hLow
Deb
tD
ebt
Deb
tD
ebt
Deb
tD
ebt
(1a)
(1b)
(2a)
(2b)
(3a)
(3b)
Ben
Tap
0.02
1−
0.67
7∗∗∗
0.18
0∗∗
0.26
1∗∗
0.77
8∗−
2.12
1(0
.224
)(0
.204
)(0
.082
)(0
.102
)(0
.403
)(9
.095
)B
enQ
E−
0.08
00.
337∗
∗−
0.20
7∗∗∗
−0.
069
0.18
7−
3.31
0(0
.219
)(0
.113
)(0
.052
)(0
.047
)(0
.443
)(2
.315
)G
ov/P
res
Tap
0.04
30.
027
0.00
8−
0.03
0−
0.12
71.
388
(0.0
68)
(0.0
55)
(0.0
11)
(0.0
22)
(0.2
48)
(1.5
45)
Gov
/Pre
sQ
E−
0.20
6∗∗
−0.
145∗
−0.
081∗
∗∗−
0.11
4∗∗∗
0.66
3∗∗
−8.
877
(0.0
76)
(0.0
73)
(0.0
16)
(0.0
33)
(0.2
26)
(9.6
82)
FO
MC
QE
0.00
40.
325∗
∗∗−
0.23
9∗∗∗
−0.
266∗
∗∗−
0.74
4−
6.83
4(0
.116
)(0
.092
)(0
.041
)(0
.086
)(0
.554
)(4
.046
)C
onst
ant
0.04
8∗∗∗
0.04
6∗∗∗
0.01
0∗0.
058∗
∗∗0.
095∗
∗0.
804
(0.0
15)
(0.0
09)
(0.0
05)
(0.0
07)
(0.0
39)
(1.0
84)
Obs
erva
tion
s2,
795
2,79
52,
795
2,58
02,
795
2,36
1R
-squ
ared
0.00
30.
011
0.01
50.
011
0.00
20.
002
No.
ofC
ount
ries
1313
1312
1311
Note
s:Se
eno
tes
tota
ble
4.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 333Tab
le7.
Diff
eren
tial
Effec
ts—
Rob
ust
and
Fra
gile
Cou
ntr
ies
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
Fra
gile
Rob
ust
Fra
gile
Rob
ust
Fra
gile
Rob
ust
(1a)
(1b)
(2a)
(2b)
(3a)
(3b)
Ben
Tap
−0.
234
−0.
478
0.11
1∗0.
409∗
∗−
3.28
94.
008∗
∗
(0.2
11)
(0.2
66)
(0.0
60)
(0.1
24)
(6.4
32)
(1.3
81)
Ben
QE
0.20
5∗∗
0.00
6−
0.13
4∗∗∗
−0.
154∗
−2.
316
0.05
8(0
.084
)(0
.306
)(0
.041
)(0
.077
)(1
.764
)(0
.399
)G
ov/P
res
Tap
0.00
40.
085
−0.
016
−0.
001
1.16
7−
0.45
2∗
(0.0
63)
(0.0
80)
(0.0
17)
(0.0
17)
(1.1
18)
(0.2
34)
Gov
/Pre
sQ
E−
0.16
3∗∗
−0.
196∗
∗−
0.11
0∗∗∗
−0.
073∗
∗∗−
6.40
30.
928∗
∗
(0.0
76)
(0.0
63)
(0.0
26)
(0.0
17)
(6.9
87)
(0.2
91)
FO
MC
QE
0.21
0∗0.
089
−0.
250∗
∗∗−
0.25
6∗∗∗
−4.
877
−1.
218
(0.1
07)
(0.1
16)
(0.0
68)
(0.0
40)
(3.0
06)
(0.7
40)
Con
stan
t0.
058∗
∗∗0.
029∗
∗0.
042∗
∗∗0.
018∗
∗0.
706
−0.
062
(0.0
13)
(0.0
11)
(0.0
05)
(0.0
07)
(0.7
89)
(0.0
47)
Obs
erva
tion
s3,
464
2,12
63,
464
1,91
13,
245
1,91
1R
-squ
ared
0.00
40.
005
0.00
90.
023
0.00
20.
015
No.
ofC
ount
ries
1710
179
169
Note
s:T
his
tabl
epr
esen
tspa
nel
fixed
-effec
tes
tim
atio
nre
sult
sw
ith
robu
stst
anda
rder
rors
inpa
rent
hese
s.**
*,**
,an
d*
deno
tep
<0.
01,p
<0.
05,an
dp
<0.
1,re
spec
tive
ly.In
depen
dent
vari
able
sar
elo
gfir
stdi
ffer
ence
ofst
ock
mar
ket
inde
x,fo
reig
nex
chan
gera
te,an
dch
ange
inC
DS
spre
ads
insp
ecifi
cati
on1,
2,an
d3,
resp
ecti
vely
.A
coun
try
isgr
ouped
unde
r“r
obus
t”or
“fra
gile
”ba
sed
onw
heth
erit
has
curr
ent
acco
unt
surp
lus,
high
rese
rves
,an
dlo
wex
tern
alde
bt.T
hus,
ifat
leas
ttw
oof
thre
e(o
rth
ree
ofth
ree)
ofth
eab
ove
crit
eria
hold
s,th
ena
coun
try
isin
the
“rob
ust
grou
p”;o
ther
wis
e,it
isin
the
“fra
gile
grou
p.”
Exc
hang
era
tees
tim
atio
nex
clud
esC
hina
;C
DS
spre
ades
tim
atio
nex
clud
esC
hina
and
Pak
ista
n.
334 International Journal of Central Banking June 2016
shown in table 7—also indicates that exchange rate depreciation isstatistically significant in both cases at the time of Bernanke’s taper-ing announcements but more than three times larger in the robustgroup (0.409) compared with the fragile group (0.111).4
By contrast, tapering announcements by Federal Reserve gover-nors or presidents had little or no discernible impact on exchangerates in emerging markets, regardless of whether they were classi-fied as robust/weak in fundamentals, had current account surplusesor deficits, had high/low international reserves, or had low/highexternal debt. This is consistent with the full-sample results.
Bernanke’s tapering news increased CDS spreads very substan-tially for countries with robust fundamentals (4.0 points; table 7),and especially for those countries with current account surpluses(3.8 points; table 4) and high international reserves (3.2 points;table 5), while having little or no effect on fragile countries (exceptfor increasing spreads marginally, 0.77 points, for those with highexternal debt positions). And, similar to the full-sample results,tapering announcements by Federal Reserve governors/presidentshad little effect on CDS spreads, lowering them overall by only –0.45(table 7; significant at the 10 percent level), apparently attribut-able to the small decline in CDS in the high-reserves group (–0.37;table 5).
Bernanke’s tapering news lowered equity market values in emerg-ing markets for the full sample (–3.28 percent; table 3) and in thecountries with low external debt positions (table 6). And, similar tothe full-sample results, group results based on fundamentals indi-cated that tapering announcements from governors/presidents didnot have any significant impact on stock markets.
Intriguingly, tables 4–7 imply that Bernanke’s tapering newsdepreciated exchange rates most in countries typically associ-ated with strong international positions—countries running currentaccount surpluses, having high reserves, and having low debt—andour aggregate of robust countries. A possible interpretation is thatfragile economies were less exposed to financial flows in search ofhigher yields during the earlier QE years; thereby they were expectedto be less exposed to the immediate impact of the tapering news.
4This difference is statistically significant, with a chi-square of 4.31 (probabil-ity 0.038).
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 335
3.3 Differential Effects of Quantitative Easing
The effects of QE news also showed substantial variation dependingon who made the statement and the international position of thecountry. Bernanke’s QE news was associated with strong exchangerate appreciation in the full sample (–0.14; table 3) as well as inboth fragile and robust groups (table 7), where the impact effectswere virtually identical (–0.13 and –0.15, respectively). Apprecia-tion was an even more dominating characteristic of countries withstrong current account positions, high international reserves, andhigh international debt.5
Significant exchange rate appreciations were also associated withFOMC QE statements in the full sample, in both fragile and weakgroups (table 7), and in all of the subsamples (table 4). Interest-ingly, no asymmetric effects were found between those with weak orstrong fundamentals—the coefficients on the exchange rate responseto FOMC QE support news were virtually identical (and significant)across subgroups.
Differential effects emerge again in stock market and CDSresponses to QE. Bernanke’s and the FOMC’s QE news were associ-ated with higher stock prices of the fragile group but did not affectthe stock prices of the strong group. By contrast, QE news from gov-ernors/presidents was associated with lower stock market indices forboth fragile and robust groups (table 7), and coefficient estimatesare similar in magnitudes regardless of international fundamentalpositions. In terms of CDS spreads, QE news from Federal Reservegovernors/presidents had no discernible effect in the full sample butappears to raise spreads for the robust group of countries (table 7).This result stems from the rise in CDS spreads in countries with highinternational reserve positions. However, somewhat at odds with theother results, spreads climbed in those countries with relatively highexternal debt positions. The differential impacts of the news sourcereflect the much higher frequency of news from governors/presidents(twenty-six tapering, twenty-two QE) in comparison with news fromBernanke (three tapering and seven QE) and FOMC QE news (five).
5The difference between depreciation in countries with high and low inter-national debt positions is statistically significant with a chi-square value of 3.25(probability 0.072).
336 International Journal of Central Banking June 2016
On balance, the market was focused and reacted more to the scarcerand more coherent news from Bernanke and the FOMC than tothe frequent and diffused news from governors/presidents. Gover-nors’/presidents’ news reflected the inner debate among heteroge-neous and non-coordinated views of the Federal Reserve’s senior offi-cials, whereas Bernanke’s and FOMC QE news were viewed as muchclearer signals regarding the stance of the Federal Reserve’s policies.These interpretations are also supported by the results reported forthe full sample (table 3).
3.4 Robust and Fragile Fundamentals and Tapering Dynamics
Emerging-market countries with robust (fragile) fundamentals—those with current account surpluses (deficits), high (low) inter-national reserves, and low (high) external debt—were most (less)affected by tapering announcements, particularly with respect toexchange rates. Robust (fragile) economies seemed to have beenmore (less) exposed to financial flows in search of higher yieldsduring the earlier QE years, and also more (less) exposed whentapering started, i.e., markets may have expected capital flow rever-sals to occur mainly in countries that had experienced the largestinflows initially. However, this may simply be the impact effect.Fragile economies could have experienced tapering effects with somedelay.
This interpretation is consistent with figures 1–6. Figures 1, 2,and 3 show the impact of Bernanke’s tapering announcements onstock prices, exchange rates, and CDS spreads, respectively, forthe fragile and strong groups. Though we find the impact effectsof Bernanke’s tapering news depreciated exchange rates most inthe robust group, the fragile group experienced more depreciationafter several months (figure 1). And while Bernanke’s tapering newscaused CDS spreads to rise substantially more in the robust group,CDS spreads eventually climbed more in the fragile group (figure 3).Stock prices did not show significant differential impact effects acrossthe fragile and robust groups, but over time it appears that therobust group has performed less well.
More formally, table 8 considers the differential impact ofannouncements on cumulative asset price changes over twenty-onebusiness days (approximately one month). The negative cumulative
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 337
Figure 1. Foreign Exchange Rate and Tapering “Events”
.98
11.
021.
041.
061.
08
Nov1 Feb1 May1 Aug1 Nov1
Robust Group Fragile Group
Notes: Vertical dashed lines indicate Bernanke’s tapering announcement dates(March 20, 2013; May 22, 2013; June 19, 2013) as described in the data section.For each country, the nominal exchange rate (national currency per U.S. dollar)index is constructed by setting the value equal to “1” at the beginning of oursample, November 27, 2012. The (unweighted) average for the “robust group”(Peru, Israel, South Korea, Malaysia, Philippines, Thailand, Bulgaria, Russia,and Hungary) and the “fragile group” (Turkey, South Africa, Argentina, Brazil,Chile, Colombia, Mexico, India, Indonesia, Pakistan, Ukraine, Czech Repub-lic, Latvia, Lithuania, Poland, and Romania) is taken on each day over thesample.
effect of Bernanke’s tapering news on fragile economies is somewhatlarger on equity prices than in robust economies. The cumulativeimpact on exchange rate depreciation in fragile and robust economiesfollowing Bernanke’s tapering announcements is very similar. Bycontrast, fragile countries experienced twice the average cumulativeincrease in CDS spreads (45 basis points) as did robust countries (18basis points) in response to Bernanke’s tapering announcements.The cumulative impacts of tapering announcements by the Fed-eral Reserve governors/presidents is more mixed—relatively smalldeclines in equity markets for the fragile group, greater exchangerate depreciation for the fragile group, and a much larger (thoughnot statistically significant) rise in CDS spreads for the fragilegroup.
338 International Journal of Central Banking June 2016
Figure 2. Stock Market Index and Tapering “Events”
100
105
110
Nov1 Feb1 May1 Aug1 Nov1
Robust Group Fragile Group
Notes: Vertical dashed lines indicate Bernanke’s tapering announcement dates(March 20, 2013; May 22, 2013; June 19, 2013) as described in the data section.For each country, the stock market index is constructed by setting the value equalto “100” at the beginning of our sample, November 27, 2012. The (unweighted)average for the “robust group” (Peru, Israel, South Korea, Malaysia, Philippines,Thailand, Bulgaria, Russia, and Hungary) and the “fragile group” (Turkey, SouthAfrica, Argentina, Brazil, Chile, Colombia, Mexico, India, Indonesia, Pakistan,Ukraine, Czech Republic, Latvia, Lithuania, Poland, and Romania) is taken oneach day over the sample.
Overlapping events is a major drawback when measuring longer-duration effects using our methodology. To address this issue, weestimated the effects of Bernanke’s tapering news alone on cumu-lative asset price changes for non-overlapping announcements. Non-overlapping events in this instance led to a nineteen-day post-eventwindow for the asset price changes and are presented in table 9. Theresults are virtually identical to the results presented in the previoustable.
Figures 4, 5, and 6 report the stock market indices, exchangerates, and sovereign spreads of Brazil and Turkey (relatively fragilecountries) and Hungary (a relatively robust country), from Novem-ber 27, 2012 to October 3, 2013. Again, toward the end of the sampleperiod, the fragile countries were not insulated from the taperingnews. Indeed, over time the fragile countries were hit harder thanthe stronger countries.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 339
Figure 3. CDS Spreads and Tapering “Events”
8010
012
014
0
Nov1 Feb1 May1 Aug1 Nov1
Robust Group Fragile Group
Notes: Vertical dashed lines indicate Bernanke’s tapering announcement dates(March 20, 2013; May 22, 2013; June 19, 2013) as described in the data section.For each country, the CDS spread index is constructed by setting the value equalto “100” at the beginning of our sample, November 27, 2012. The (unweighted)average for the “robust group” (Peru, Israel, South Korea, Malaysia, Philippines,Thailand, Bulgaria, Russia, and Hungary) and the “fragile group” (Turkey, SouthAfrica, Argentina, Brazil, Chile, Colombia, Mexico, India, Indonesia, Pakistan,Ukraine, Czech Republic, Latvia, Lithuania, Poland, and Romania) is taken oneach day over the sample.
The impact of the tapering news focused first on the strong coun-tries, probably in anticipation of large short-run outflows of past hotmoney inflows. Market attention shifted over time to the possibilitythat fragile countries would find it harder to adjust to the higher U.S.interest rates induced by future tapering, leading to large adjust-ments in the last quarter of 2013. Arguably, the initial large effectof the tapering news, affecting mostly the strong countries, may alsoreflect financial markets’ initial inattention to tail risks, overlook-ing the vulnerability of the weaker emerging markets to the adverseimplications of higher future global interest rates. Indeed, in the lastquarter of 2013, financial markets refocused attention on the fragileemerging markets and hammered the prices of the “Fragile Five”—Brazil, India, Indonesia, South Africa, and Turkey—a subgroup ofthe weaker emerging markets.
340 International Journal of Central Banking June 2016
Tab
le8.
Diff
eren
tial
Effec
tsO
ver
One-
Mon
thEve
nt
Win
dow
and
Ass
etP
rice
Chan
ges—
Rob
ust
and
Fra
gile
Cou
ntr
ies
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
Fra
gile
Rob
ust
Fra
gile
Rob
ust
Fra
gile
Rob
ust
(1a)
(1b)
(2a)
(2b)
(3a)
(3b)
Ben
Tap
−3.
378∗
∗−
2.64
4∗∗
1.43
7∗∗∗
1.55
8∗∗∗
45.4
17∗
18.4
84∗∗
∗
(1.1
94)
(0.8
33)
(0.3
12)
(0.2
57)
(24.
965)
(2.6
12)
Ben
QE
0.90
31.
488∗
∗−
0.06
20.
471
9.82
93.
129
(0.6
47)
(0.5
96)
(0.2
75)
(0.3
27)
(15.
972)
(2.6
65)
Gov
/Pre
sTap
−1.
377∗
∗∗−
2.30
2∗∗∗
0.83
8∗∗∗
0.27
5∗∗
68.0
365.
615∗
∗∗
(0.3
52)
(0.6
51)
(0.2
32)
(0.1
15)
(57.
096)
(1.0
92)
Gov
/Pre
sQ
E−
1.21
6∗∗∗
−1.
424∗
∗−
0.70
6∗∗
−0.
190
−34
.842
0.89
9(0
.406
)(0
.628
)(0
.288
)(0
.337
)(3
7.06
5)(1
.423
)FO
MC
QE
0.96
72.
001∗
−1.
282∗
∗∗−
0.84
3∗∗∗
−31
.166
−10
.358
∗∗∗
(0.5
80)
(0.9
83)
(0.2
71)
(0.2
27)
(21.
313)
(2.9
17)
Con
stan
t3.
601∗
∗∗3.
168∗
∗0.
338
−0.
301
−33
.890
−7.
843∗
∗∗
(0.7
68)
(1.0
97)
(0.2
84)
(0.4
17)
(25.
013)
(1.9
90)
Obs
erva
tion
s3,
784
2,32
63,
784
2,09
13,
537
2,09
1R
-squ
ared
0.12
40.
179
0.16
90.
188
0.02
60.
267
No.
ofC
ount
ries
1710
179
169
Note
s:Se
eno
testo
tabl
e7.
Eve
ntw
indo
wsar
eex
tend
edto
twen
ty-o
neda
ys(s
tart
ing
from
the
day
ofan
noun
cem
ents
),an
dcu
mul
ativ
eas
set
pric
ech
ange
sov
erth
esa
me
even
tw
indo
war
eco
nsid
ered
.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 341
Tab
le9.
Diff
eren
tial
Effec
tsO
ver
Non
-Ove
rlap
pin
g(O
ne-
Mon
th)
Eve
nts
—R
obust
and
Fra
gile
Cou
ntr
ies
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
Fra
gile
Rob
ust
Fra
gile
Rob
ust
Fra
gile
Rob
ust
Ben
Tap
−4.
246∗
∗∗−
3.99
8∗∗∗
1.66
1∗∗∗
1.63
8∗∗∗
46.0
49∗∗
21.1
73∗∗
∗
(1.1
52)
(0.9
92)
(0.3
64)
(0.2
94)
(20.
701)
(2.8
92)
Con
stan
t2.
170∗
∗∗1.
447∗
∗∗−
0.09
4−
0.43
4∗∗∗
−9.
695∗
−5.
847∗
∗∗
(0.2
97)
(0.2
60)
(0.0
94)
(0.0
77)
(5.3
49)
(0.7
59)
Obs
erva
tion
s3,
784
2,32
63,
784
2,09
13,
537
2,09
1R
-squ
ared
0.11
40.
129
0.09
10.
127
0.01
00.
198
No.
ofC
ount
ries
1710
179
169
Note
s:Se
eno
tes
tota
ble
7.T
heeff
ects
ofB
erna
nke’
sta
per
ing
new
sar
ees
tim
ated
alon
eon
cum
ulat
ive
asse
tpr
ice
chan
ges
for
non-
over
lapp
ing
anno
unce
men
tsov
era
nine
teen
-day
pos
t-ev
ent
win
dow
.
342 International Journal of Central Banking June 2016
Figure 4. Selected Countries: Stock Marketand Tapering “Events”
8090
100
110
120
130
Nov1 Feb1 May1 Aug1 Nov1
Turkey BrazilHungary
Notes: Vertical dashed lines indicate Bernanke’s tapering announcement dates(March 20, 2013; May 22, 2013; June 19, 2013) as described in the data section.For each country, the stock market index is constructed by setting the value equalto “100” at the beginning of our sample, November 27, 2012.
Figure 5. Selected Countries: Foreign Exchange Rateand Tapering “Events”
.91
1.1
1.2
Nov1 Feb1 May1 Aug1 Nov1
Turkey BrazilHungary
Notes: Vertical dashed lines indicate Bernanke’s tapering announcement dates(March 20, 2013; May 22, 2013; June 19, 2013) as described in the data section.For each country, the nominal exchange rate (national currency per U.S. dollar)index is constructed by setting the value equal to “1” at the beginning of oursample, November 27, 2012.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 343
Figure 6. Selected Countries: CDS Spreadsand Tapering “Events”
5010
015
020
0
Nov1 Feb1 May1 Aug1 Nov1
Turkey BrazilHungary
Notes: Vertical dashed lines indicate Bernanke’s tapering announcement dates(March 20, 2013; May 22, 2013; June 19, 2013) as described in the data section.For each country, the CDS spread index is constructed by setting the value equalto “100” at the beginning of our sample, November 27, 2012.
4. Extensions
4.1 Fragile and Robust Groupings
In the previous sections we distinguished between fragile and robusteconomies using the following criteria: (i) median values for externaldebt (above the median indicates fragile and below median indicatesrobust) and international reserves (above median indicates robustand below median indicates fragile), and (ii) current account sur-pluses (robust) and deficits (fragile). We modify these criteria tobe median values for all three fundamentals, i.e., changing our cri-teria for current accounts from surplus/deficits to above/below themedian values in the sample. In table 10 we present results where theclassification of a “robust” current account is any value above themedian (–1.24) and a “fragile” current account is any value below themedian. This gives somewhat different groupings for robust/fragile,with Argentina, Latvia, and Pakistan moving from the fragile tothe robust group. Results shown in table 10 are almost identical to
344 International Journal of Central Banking June 2016Tab
le10
.D
iffer
ential
Effec
ts—
Alter
nat
ive
Rob
ust
and
Fra
gile
Cou
ntr
yG
roups
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
Fra
gile
Rob
ust
Fra
gile
Rob
ust
Fra
gile
Rob
ust
(1a)
(1b)
(2a)
(2b)
(3a)
(3b)
Ben
Tap
−0.
244
−0.
412∗
0.14
1∗0.
303∗
∗3.
194∗
∗−
4.97
3(0
.261
)(0
.206
)(0
.072
)(0
.107
)(1
.393
)(8
.775
)B
enQ
E0.
271∗
∗∗−
0.01
4−
0.14
2∗∗
−0.
140∗
∗−
0.41
0−
2.60
3(0
.079
)(0
.241
)(0
.047
)(0
.060
)(0
.440
)(2
.400
)G
ov/P
res
Tap
0.02
30.
047
−0.
022
0.00
20.
056
1.16
6(0
.068
)(0
.055
)(0
.021
)(0
.013
)(0
.191
)(1
.568
)G
ov/P
res
QE
−0.
132
−0.
220∗
∗∗−
0.12
8∗∗∗
−0.
063∗
∗∗0.
657∗
∗∗−
8.86
7(0
.088
)(0
.056
)(0
.028
)(0
.017
)(0
.171
)(9
.682
)FO
MC
QE
0.19
70.
132
−0.
274∗
∗∗−
0.22
9∗∗∗
−2.
132∗
∗∗−
5.19
1(0
.131
)(0
.094
)(0
.081
)(0
.040
)(0
.538
)(4
.229
)C
onst
ant
0.02
00.
074∗
∗∗0.
042∗
∗∗0.
024∗
∗∗0.
230∗
∗∗0.
644
(0.0
15)
(0.0
09)
(0.0
05)
(0.0
05)
(0.0
37)
(1.0
82)
Obs
erva
tion
s2,
795
2,79
52,
795
2,58
02,
791
2,36
5R
-squ
ared
0.00
50.
005
0.01
00.
019
0.00
60.
002
No.
ofC
ount
ries
1313
1312
1311
Note
s:T
heta
ble
pres
ents
pane
lfix
ed-e
ffec
tes
tim
atio
nre
sult
sw
ith
robu
stst
anda
rder
rors
inpa
rent
hese
s.**
*,**
,an
d*
deno
tep
<0.
01,p
<0.
05,an
dp
<0.
1,re
spec
tive
ly.In
depen
dent
vari
able
sar
elo
gfir
stdi
ffer
ence
ofst
ock
mar
ket
inde
x,fo
reig
nex
chan
gera
te,an
dch
ange
inC
DS
spre
ads
insp
ecifi
cati
on1,
2,an
d3,
resp
ecti
vely
.A
coun
try
isgr
ouped
unde
r“r
obus
t”or
“fra
gile
”ba
sed
onw
heth
erit
has
high
curr
ent
acco
unt
bala
nce
(im
plyi
nggr
eate
rth
anm
edia
nva
lue
ofth
esa
mpl
eof
coun
trie
s),hi
ghre
serv
es,an
dlo
wex
tern
alde
bt.T
hus,
ifat
leas
ttw
oof
thre
e(o
rth
ree
ofth
ree)
ofth
eab
ove
crit
eria
hold
s,th
ena
coun
try
isin
the
“rob
ust
grou
p”;
othe
rwis
e,it
isin
the
“fra
gile
grou
p.”
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 345
those in table 4, however, and the main results are qualitatively notaffected by this change in the robust/fragile groups.
4.2 Financial Development
Another issue is whether the degree of financial development is acritical distinguishing characteristic between countries in how theyrespond to tapering announcements. That is, is this institutionalfeature important in how tapering and quantitative easing announce-ments affect asset prices in emerging markets? To address this issuewe use the World Economic Forum’s Financial Development Index,and use the median value of the sample to divide countries into“high” and “low” degrees of financial development. Table 11 reportsthe results in an analogous fashion to table 4.
The results indicate that countries with a high degree of finan-cial development had larger declines in equity markets in response toBernanke’s tapering announcements than did those with low degreesof financial development. They also experienced greater exchangerate depreciation and larger increases in CDS spreads than didcountries with low levels of financial development. The “taperingresponse” of more financially developed (less financially developed)emerging economies is broadly similar to those with the robust (frag-ile) fundamentals, providing an alternative explanation for why thesecountries were hardest hit by tapering announcements.
4.3 U.S. Interest Rates
Another important question is whether tapering and QE announce-ments are transmitted to emerging-market equity prices, exchangerates, and CDS spreads through U.S. interest rates only, or whetherthere is an additional transmission channel at work. To address thisissue, we included in the baseline regression (table 3) U.S. interestrates of various maturities. In particular, we considered one-month,three-month, six-month, one-year, five-year, ten-year, and twenty-year U.S. Treasury interest rates, each entered separately in theregression equations.
The response of equity prices to Bernanke tapering results wasvery stable regardless of which U.S. interest rate was included inthe regression, with coefficients ranging from –0.321 to –0.428, all
346 International Journal of Central Banking June 2016Tab
le11
.D
iffer
ential
Effec
ts—
Fin
anci
alD
evel
opm
ent
(WEF
Index
)
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
Les
sM
ore
Les
sM
ore
Les
sM
ore
Dev
elop
edD
evel
oped
Dev
elop
edD
evel
oped
Dev
elop
edD
evel
oped
(1a)
(1b)
(2a)
(2b)
(3a)
(3b)
Ben
Tap
−0.
232
−0.
424∗
0.11
00.
337∗
∗∗−
3.78
62.
684∗
∗
(0.2
67)
(0.1
98)
(0.0
78)
(0.0
96)
(8.1
64)
(0.9
74)
Ben
QE
0.23
3∗0.
024
−0.
097∗
−0.
188∗
∗∗−
2.58
5−
0.25
4(0
.125
)(0
.224
)(0
.054
)(0
.050
)(2
.209
)(0
.387
)G
ov/P
res
Tap
0.01
70.
053
−0.
003
−0.
018
1.26
0−
0.12
8(0
.066
)(0
.058
)(0
.018
)(0
.017
)(1
.434
)(0
.110
)G
ov/P
res
QE
−0.
185∗
−0.
166∗
∗∗−
0.08
5∗∗∗
−0.
110∗
∗∗−
7.87
30.
495∗
∗
(0.0
94)
(0.0
49)
(0.0
25)
(0.0
27)
(8.8
53)
(0.2
23)
FO
MC
QE
0.20
40.
125
−0.
245∗
∗∗−
0.26
0∗∗∗
−6.
125
−0.
946
(0.1
37)
(0.0
84)
(0.0
68)
(0.0
62)
(3.7
66)
(0.5
34)
Con
stan
t0.
057∗
∗∗0.
037∗
∗∗0.
042∗
∗∗0.
024∗
∗∗0.
846
−0.
004
(0.0
14)
(0.0
11)
(0.0
05)
(0.0
06)
(0.9
97)
(0.0
35)
Obs
erva
tion
s2,
795
2,79
52,
795
2,58
02,
576
2,58
0R
-squ
ared
0.00
50.
004
0.00
80.
017
0.00
20.
009
No.
ofC
ount
ries
1313
1312
1212
Note
s:T
heta
ble
pres
ents
pane
lfix
ed-e
ffec
tes
tim
atio
nre
sult
sw
ith
robu
stst
anda
rder
rors
inpa
rent
hese
s.**
*,**
,an
d*
deno
tep
<0.
01,p
<0.
05,an
dp
<0.
1,re
spec
tive
ly.In
depen
dent
vari
able
sar
elo
gfir
stdi
ffer
ence
ofst
ock
mar
ket
inde
x,fo
reig
nex
chan
gera
te,an
dch
ange
inC
DS
spre
ads
insp
ecifi
cati
on1,
2,an
d3,
resp
ecti
vely
.Les
s(m
ore)
finan
cial
deve
lopm
ent
isba
sed
onth
eW
orld
Eco
nom
icFo
rum
(WE
F)
Fin
anci
alD
evel
opm
ent
Inde
x(2
012)
valu
eof
less
(mor
e)th
an3.
29(o
vera
llin
dex
valu
e).T
heW
EF
inde
xis
not
repor
ted
for
Lit
huan
ia,
Lat
via,
and
Bul
gari
a;th
us,
base
don
thei
rcr
edit
/GD
Pm
easu
res,
we
incl
ude
Lit
huan
iain
the
less
deve
loped
grou
p,an
dLat
via
and
Bul
gari
ain
the
mor
ede
velo
ped
grou
p.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 347
of which were statistically significant (compared with the baselineregression coefficient of –0.327). Similarly, the baseline coefficient onthe exchange rate from Bernanke tapering was 0.129, compared withcoefficients ranging from 0.123 to 0.225 (six of seven are statisticallysignificant) when U.S. interest rates were included. Bernanke taper-ing did not have a significant impact on CDS spreads in the base-line regression, and was also not significant in the seven regressionswhere U.S. interest rates were included. The other results are alsovery similar to the baseline regressions, indicating that controllingfor U.S. interest rates does not change the transmission of tapering(or quantitative easing) “news” announcements on emerging-marketasset prices. (Detailed results are not included for brevity but areavailable from the authors upon request.)
While we focused above on price transmission channels, operat-ing via the exchange rate and asset prices, some transmission mayoperate through quantities, impacting the emerging markets via cap-ital flows (Caruana 2012). Specifically, tapering information maychange the expected future cross-border bank landing (the creditchannel) and portfolio flows (market risk taking).6
4.4 Interactions with Fundamentals
An alternative approach to grouping countries with respect totheir common fundamentals (“robust” or “fragile”) is to interactannouncements with the level of the fundamental (e.g., BenTap ×Reserves/GDP). We conduct this analysis for exchange rates andthe five types of announcements, reporting the results in table 12.Table 13 reports the joint significance tests (of the announce-ment coefficient and the interaction term coefficient). If countries
6The value of aggregate cross-border bond and equity investment in emerging-market economies increased from $3.29 trillion at the end of 2007 to $4.46 trillionat the end of 2012, according to the International Monetary Fund’s CoordinatedPortfolio Investment Survey. About 85 percent of the increase was in the formof debt, with a much smaller part in equity. Thus, cross-border debt invest-ment has been a significant driver of credit growth in many emerging markets(Mohanty 2014). These developments may have increased the emerging mar-kets’ vulnerability. Such borrowing may be highly procyclical, increasing theborrowers’ exposure to exchange rate risk—at times of stress, sharp exchangerate depreciations may result in further selling pressure on emerging-marketeconomies.
348 International Journal of Central Banking June 2016Tab
le12
.In
tera
ctio
ns
with
Fundam
enta
ls—
Exch
ange
Rat
eEst
imat
ions
(1)
(2)
(3)
(4)
(5)
Ben
Tap
0.21
9∗∗∗
0.27
2∗∗∗
−0.
024
0.39
2∗∗∗
0.23
9∗
(0.0
64)
(0.0
69)
(0.0
84)
(0.1
10)
(0.1
28)
Ben
QE
−0.
141∗
∗∗−
0.15
1∗∗∗
−0.
054
−0.
004
−0.
000
(0.0
37)
(0.0
48)
(0.0
67)
(0.0
55)
(0.0
82)
Gov
/Pre
sTap
−0.
010
−0.
009
−0.
017
−0.
009
−0.
010
(0.0
12)
(0.0
13)
(0.0
26)
(0.0
24)
(0.0
32)
Gov
/Pre
sQ
E−
0.09
7∗∗∗
−0.
094∗
∗∗−
0.09
1∗−
0.08
1∗∗
−0.
066
(0.0
18)
(0.0
16)
(0.0
47)
(0.0
31)
(0.0
50)
FO
MC
QE
−0.
252∗
∗∗−
0.25
3∗∗∗
−0.
145
−0.
214∗
∗−
0.09
0(0
.045
)(0
.037
)(0
.101
)(0
.085
)(0
.096
)B
enTap
*C
AB
/GD
P0.
040∗
∗0.
026
(0.0
17)
(0.0
17)
Ben
QE
*C
AB
/GD
P−
0.00
7−
0.00
3(0
.012
)(0
.012
)G
ov/P
res
Tap
*C
AB
/GD
P0.
001
0.00
1(0
.003
)(0
.003
)G
ov/P
res
QE
*C
AB
/GD
P0.
002
0.00
3(0
.005
)(0
.006
)FO
MC
QE
*C
AB
/GD
P−
0.00
10.
010
(0.0
12)
(0.0
13)
Ben
Tap
*R
eser
ves/
GD
P0.
012∗
∗0.
014∗
∗∗
(0.0
04)
(0.0
04)
(con
tinu
ed)
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 349Tab
le12
.(C
ontinued
)
(1)
(2)
(3)
(4)
(5)
Ben
QE
*R
eser
ves/
GD
P−
0.00
4−
0.00
1(0
.003
)(0
.003
)G
ov/P
res
Tap
*R
eser
ves/
GD
P0.
000
0.00
0(0
.001
)(0
.001
)G
ov/P
res
QE
*R
eser
ves/
GD
P−
0.00
0−
0.00
0(0
.002
)(0
.002
)FO
MC
QE
*R
eser
ves/
GD
P−
0.00
5−
0.00
7∗
(0.0
03)
(0.0
04)
Ben
Tap
*E
xter
nalD
ebt/
GD
P−
0.00
3∗∗
−0.
005∗
∗∗
(0.0
01)
(0.0
01)
Ben
QE
*E
xter
nalD
ebt/
GD
P−
0.00
3∗∗∗
−0.
003∗
∗∗
(0.0
01)
(0.0
01)
Gov
/Pre
sTap
*E
xter
nalD
ebt/
GD
P−
0.00
0−
0.00
0(0
.000
)(0
.000
)G
ov/P
res
QE
*E
xter
nalD
ebt/
GD
P−
0.00
0−
0.00
0(0
.000
)(0
.000
)FO
MC
QE
*E
xter
nalD
ebt/
GD
P−
0.00
1−
0.00
0(0
.001
)(0
.001
)C
onst
ant
0.03
3∗∗∗
0.03
3∗∗∗
0.03
3∗∗∗
0.03
3∗∗∗
0.03
3∗∗∗
(0.0
04)
(0.0
04)
(0.0
04)
(0.0
04)
(0.0
04)
Obs
erva
tion
s5,
375
5,37
55,
375
5,37
55,
375
R-s
quar
ed0.
012
0.01
30.
013
0.01
30.
015
Note
s:R
obus
tst
anda
rder
rors
are
inpa
rent
hese
s.**
*,**
,an
d*
deno
tep
<0.
01,p
<0.
05,an
dp
<0.
1,re
spec
tive
ly.
350 International Journal of Central Banking June 2016
Table 13. Significance Test Results
Columns from Table 12
(2) (3) (4) (5)
Significance of Sum of the CoefficientsF-statistics 15 0.02 12.64 4.04Prob > F (p-value) (0.001) (0.883) (0.002) (0.056)
Joint Significance of the CoefficientsF-statistics 7.76 7.84 6.94 12.39Prob > F (p-value) (0.003) (0.002) (0.004) (0.000)
Notes: The table reports the significance test results for the Ben tapering and Bentapering interaction with the fundamentals from table 12, specifications 2–5.
with stronger fundamentals are affected more by tapering (consis-tent with the earlier analysis), then we would expect a positivecoefficient on BenTap × CAB/GDP (i.e., the larger the currentaccount surplus, the larger is exchange rate depreciation associ-ated with a Bernanke tapering announcement), a positive coefficienton BenTap × Reserves/GDP (i.e., the larger the level of reserves,the larger is exchange rate depreciation associated with a Bernanketapering announcement), and a negative coefficient on BenTap ×ExternalDebt/GDP (i.e., the larger the level of external debt, the lessis exchange rate depreciation associated with a Bernanke taperingannouncement).
Column 1 of table 12 reports the baseline results without inter-action terms (as in table 3) for comparison purposes. Column 2reports the interactions of tapering announcements with the currentaccount (CAB/GDP), column 3 reports interactions with reserves(Reserves/GDP), column 4 reports interactions with external debt(ExternalDebt/GDP), and column 5 combines the three sets of inter-action terms into one regression.
Focusing on Bernanke’s tapering announcements (BenTap) incolumns 2–4, the results indicate that larger current account sur-pluses are associated with greater exchange rate deprecation (coeffi-cient of 0.040), larger reserves are associated with greater exchangerate depreciation (0.012), and high external debt is associated with
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 351
less exchange rate depreciation. It is useful to calculate the estimatedeffect for the robust and fragile groups using mean and median val-ues (for each group) of the fundamentals. The estimated impact onexchange rates from BenTap for a country with a mean “robust”(“fragile”) current account is 0.37 (0.14), for reserves is 0.37 (0.16),and for external debt is 0.26 (0.25). The same basic results hold upin the combined regression (column 5), with the exception of theinteraction term with current account balances.
The bulk of these results are therefore consistent with our earlierresults, i.e., countries with stronger fundamentals appear to be moreaffected by tapering announcements.
4.5 Excluding Bernanke’s May 22 Tapering Announcement
A natural question that arises is whether the Bernanke taperingresults are entirely driven by the market shock of the May 22announcement. To address this issue, we reestimate the basic modelsestimated in table 3 with the modification that the Bernanke taper-ing announcements exclude the May 22 observation. Interestingly,the effect of the Bernanke tapering announcements excluding May22 is greater on equity markets (an estimated coefficient of –0.416,compared with –0.327 in table 3) but less on exchange rate depreci-ation (0.116, and not statistically significant, compared with 0.219).The effect on CDS spreads remains insignificant. The impact of theother announcements (e.g., other tapering and QE) is not affectedby excluding Bernanke’s May 22 tapering statement.
4.6 Individual Country Effects
We estimated our models with country fixed effects and in sev-eral formulations divided the sample into fragile and robusteconomies. This subsection shows the effects of tapering announce-ments by individual countries. In particular, in table 14, weshow the effects of Bernanke’s tapering announcements and gov-ernors’/presidents’ tapering announcements on asset prices for indi-vidual countries. In the table we report the sum of the commontapering event coefficient β1 from β1 × Ben Tapt (or β3 fromβ3 ×GovPres Tapt) and the coefficient of the interaction term fromBen Tt (GovPres Tapt) and the country-specific dummy variable.
352 International Journal of Central Banking June 2016
Tab
le14
.Sig
nifi
cance
ofSum
ofTap
erin
gEve
nts
and
Cou
ntr
y*T
aper
ing
Inte
ract
ions
Sto
ckM
arke
tExch
ange
Rat
eC
DS
Spre
ads
Gov
/Pre
sG
ov/P
res
Gov
/Pre
sB
enTap
Tap
Ben
Tap
Tap
Ben
Tap
Tap
Cou
ntr
y+
Inte
ract
ion
+In
tera
ctio
n+
Inte
ract
ion
+In
tera
ctio
n+
Inte
ract
ion
+In
tera
ctio
n
Tur
key
1.06
8−
0.36
3−
0.01
20.
010
−1.
110
0.92
0S.
Afr
ica
−0.
289
−0.
162
0.06
7−
0.07
70.
995#
−0.
270#
Arg
enti
na−
0.34
3−
0.30
8−
0.04
9−
0.04
3−
78.4
6526
.197
Bra
zil
−1.
175
−0.
072
0.84
6−
0.13
06.
276
−0.
760
Chi
le0.
318
0.24
80.
278
−0.
006
1.04
5−
0.40
4C
olom
bia
−0.
166
0.16
20.
120#
−0.
002
4.61
5−
0.48
2M
exic
o−
0.38
4−
0.14
8−
0.07
1−
0.16
93.
538
−0.
285
Per
u−
0.16
8−
0.09
40.
152
−0.
035
4.55
5−
0.98
2Is
rael
−0.
080
0.12
70.
499
−0.
022
0.14
8#−
1.52
7In
dia
−1.
954
−0.
189
0.44
10.
035
4.36
00.
182#
Indo
nesi
a−
2.00
50.
368
−0.
094
0.00
616
.683
−1.
243
S.K
orea
−1.
314
−0.
286
0.87
10.
040
1.15
4−
0.77
5M
alay
sia
−0.
461
0.18
00.
626
−0.
060
11.4
92−
0.43
3#
Pak
ista
n−
0.19
40.
180
−0.
003#
0.01
4P
hilip
pine
s−
1.09
20.
066
0.91
10.
066
9.10
6−
0.67
2#
Tha
iland
−1.
718
−0.
075
0.51
00.
026
−0.
032#
−0.
727
Bul
gari
a0.
045
0.44
5−
0.06
90.
006
1.41
6−
0.43
2#
Rus
sia
0.49
6−
0.08
30.
180
0.01
71.
619
−0.
153
Ukr
aine
1.08
30.
065
−0.
019
−0.
018
−3.
845
0.84
6C
zech
R.
0.20
90.
152
0.27
00.
014
−0.
103#
−0.
282#
Lat
via
0.04
60.
226
−0.
034
0.02
10.
580#
−0.
106#
Hun
gary
0.83
30.
089
−0.
008
−0.
045
1.02
4#−
2.45
4Lit
huan
ia−
0.12
2−
0.03
4−
0.05
40.
006
−0.
538#
−0.
621#
Pol
and
−0.
277
−0.
218
0.04
5−
0.01
40.
655#
−0.
700#
Rom
ania
0.38
20.
364
Note
s:T
heta
ble
repor
tsth
esu
mof
coeffi
cien
tsof
taper
ing
even
ts(B
erna
nke’
sta
per
ing
anno
unce
men
tsan
dgo
vern
ors’
/pre
side
nts’
taper
ing
anno
unce
men
ts)
and
coun
try
dum
my*
taper
ing
inte
ract
ions
.In
itia
lre
gres
sion
sin
clud
eal
lta
per
ing
and
QE
even
tsas
inou
rba
selin
ere
gres
sion
s.In
tera
ctio
nte
rms
are
incl
uded
for
taper
ing
only
wit
hco
untr
ydu
mm
ies.
#in
dica
tes
ifth
esu
ms
ofco
effici
ents
are
notsi
gnifi
cant
at10
per
cent
orlo
wer
valu
e.A
llot
her
coeffi
cien
tsar
est
atis
tica
llysi
gnifi
cant
atco
nven
tion
alle
vels
.
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 353
This measures the effect of tapering on a particular country. (Allresponses are statistically significant at the 10 percent level or higherunless indicated.)
The results reported in table 14 show substantial diversityof response across countries. For example, Bernanke’s taperingannouncements are associated with decreases (increases) in stockprices in sixteen of twenty-five (nine of twenty-five) cases, and allresponses are statistically significant. While the results for the fullsample indicate an average response of –0.327 to Bernanke’s taper-ing announcements (table 3), the average response of the countriesexperiencing declines (increases) in stock prices is –0.734 (0.498).Similarly, Bernanke’s tapering announcements are associated withdepreciating currencies in fourteen of twenty-four countries, and withappreciating currencies in ten of twenty-four countries. Again theresults are consistent with the full-sample response (0.219) reportedin table 3—the average response of the fourteen depreciating coun-tries in table 14 is 0.438, compared with an average response of–0.046 for the ten appreciating countries.
5. Concluding Remarks
Chairman Bernanke’s tapering news had large effects on emerg-ing markets, resulting in substantial drops in stock market indicesand large exchange rate depreciations. This indicates the expecta-tion of reduced capital inflows and carry-trade activity to emerg-ing markets, with less investment in equity markets. By contrast,numerous and frequently quite vigorous statements in support oftapering by Federal Reserve presidents had little discernible effecton emerging-market financial prices—equities, exchange rates, CDSspreads—during our sample period. This may be because one ofthe Federal Reserve presidents—Fisher of the Federal Reserve Bankof Dallas—made many public statements advocating tapering (nineof our twenty-six events) that may have been discounted by finan-cial markets due to the frequency and predictability of the message.QE statements by governors/presidents were associated with sig-nificant exchange rate appreciation, however, as were statementsby Bernanke and the FOMC in favor of continuing the program.Statements in support of continuing QE were across a broad spec-trum of Federal Reserve governors (including Vice Chair Yellen) and
354 International Journal of Central Banking June 2016
Federal Reserve Bank presidents during our sample period, perhapsaccounting for the strong impact on the markets.
Our analysis also identified strong and systematic heterogene-ity of adjustment to Federal Reserve tapering (and QE) news acrossemerging markets. The initial impact of Chairman Bernanke’s taper-ing news had the largest effect on exchange rates in the emergingmarkets that had robust/strong international positions (i.e., cur-rent account surpluses, low foreign debt, high international reserves)or had more developed financial sectors. Tapering news by FederalReserve presidents had little or no discernible impact on exchangerates regardless of whether they were classified as robust/weak ina combination of fundamentals, had current account surpluses ordeficits, had high/low international reserves, or had low/high exter-nal debt. However, when we considered the differential impact ofannouncements on cumulative asset price changes over twenty-onebusiness days (approximately one month), the effect of Bernanke’stapering news on fragile economies is (i) somewhat larger onequity prices than in robust economies; (ii) very similar to robusteconomies on exchange rate depreciation; and (iii) much greater(twice the average cumulative increase) on CDS spreads than inrobust economies.
In terms of the dynamics of financial markets in robust and frag-ile economies, it appears that emerging markets with more frag-ile international positions were also affected, especially the “FragileFive,” over periods extending beyond the initial effects of FederalReserve tapering announcements. These results suggest that, in theera of financial globalization, emerging-market financial markets arenot insulated from expected changes in the Federal Reserve’s policystance, although it is sensitive to the heterogeneity among countries(Powell 2013 and Nechio 2014). The factors accounting for the tim-ing and the intensity of market reactions deserve further exploration.The greater impact of Federal Reserve news on the robust emergingmarkets may be explained by anticipated balance sheet adjustments,where the size of positions and the liquidity of markets play a role(Eichengreen and Gupta 2014). Alternatively, market attention mayshift over time from the short-run adjustment of positions to thereassessment of the greater adjustment challenges facing the fragilecountries to the post-tapering world (Mondria, Wu, and Chang 2010and Sims 2010). Investigating the possible linkages between faster
Vol. 12 No. 2 The Transmission of Federal Reserve Tapering 355
price adjustment and less volatile future growth patterns is left forfuture research.
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