NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Taper Tantrums: QE, its Aftermath and Emerging Market Capital Flows

Anusha Chari, Karlye Dilts Stedman, Christian Lundblad

NBER Working Paper No. 23474
Issued in June 2017
NBER Program(s):Asset Pricing, International Finance and Macroeconomics, Monetary Economics

This paper provides a novel perspective on the impact of U.S. unconventional monetary policy (UMP) on emerging market capital flows and asset prices. Using high-frequency Treasury futures data to identify U.S. monetary policy shocks, we find, through the lens of an affine term structure model, that these shocks represent revisions to both the expected path of short-term interest rates and required risk compensation. The risk compensation component is especially important during the UMP periods. Further, we find that these high-frequency policy shocks do exhibit sizable effects on U.S. holdings of emerging market assets and their valuations. We also document that the relative effects of U.S. monetary policy shocks are larger for emerging asset returns relative to physical capital flows, and they are largest for emerging equity markets relative to fixed income markets. Last, these effects are largest when the Federal Reserve is engaged in “tapering” its large-scale asset purchase program.

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Document Object Identifier (DOI): 10.3386/w23474

 
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