Which countries were impacted more by Fed taper talk?

Well taper has finally arrived minus the hoopla which came with when the word taper. Taper was mentioned in May-2013 by Herr Bernnake and finally not done in Sep 2013 policy.

Barry Eichengreen and Poonam Gupta have done this really useful research ( a longer version of research here)evaluating which countries were impacted the most in the period May-2013 and Sep-2013. Ever since it was released yday, this voxeu article has been mentioned in most places, much like most Prof. Eichengreen work.

The results are quite surprising actually:

Fed tapering has started. A revival of last summer’s emerging economy turmoil is a real concern. This column discusses new research into who was hit and why by the June 2013 taper-talk shock.

Those hit hardest had relatively large and liquid financial markets, and had allowed large rises in their currency values and their trade deficits.

Good macro fundamentals did not provide much insulation, nor did capital controls.

The best insulation came from macroprudential policies that limited exchange rate appreciation and trade deficit widening in response to foreign capital inflows.

So basically none of the so called Washington consensus/ideal economic situations worked. What mattered more was the interventionist and non-market measures. You could call them macroprudential though..

In case of countries having large financial markets like India and Brazil (as per the graphs), currency/markets crashed more.. Why?

Investors seeking to rebalance their portfolios concentrated on emerging markets with relatively large and liquid financial systems. These were the markets where they could most easily sell without incurring losses, and where there was the most scope for portfolio rebalancing. The obvious contrast is with so-called frontier markets with smaller and less liquid financial systems. This is a reminder that success at growing the financial sector can be a mixed blessing. Among other things, it can accentuate the impact on an economy of financial shocks emanating from outside.

Strange to see India having the largest financial market (have to see how they measure it) in the select group. As each time our experts make us believe our markets are so small and non-dynamic.

It alsi points to the negatives of dynamic financial markets which is hardly mentioned in textbooks/papers. This does not mean we should not have big dynamic financial markets, just that we should be aware of risks.


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