International Financial Spillovers to Emerging Market Economies: How Important are Economic Fundamentals?

36 Pages Posted: 8 Oct 2015

See all articles by Shaghil Ahmed

Shaghil Ahmed

Board of Governors of the Federal Reserve System

Brahima Coulibaly

Board of Governors of the Federal Reserve System - Division of International Finance (IFDP)

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston

Multiple version iconThere are 2 versions of this paper

Date Written: 2015-04-22

Abstract

We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs). Our analysis covers the so-called taper-tantrum episode of 2013 and six earlier episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in quite early and persisted throughout this episode. (3) Controlling for economic fundamentals, we also find that, during the taper tantrum, financial conditions deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) For earlier episodes, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities during EME crises of the 1990s and early 2000s. (5) That said, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode. Differences in economic fundamentals played a role in explaining the heterogeneous EME financial market responses during the global financial crisis of 2008, and the role of fundamentals appeared to progressively increase through the European crisis in 2011 and subsequently the 2013 taper tantrum.

Keywords: Emerging market economies, financial spillovers, economic fundamentals, vulnerability, depreciation pressure, taper tantrum, financial stress

JEL Classification: E50, F30

Suggested Citation

Ahmed, Shaghil and Coulibaly, Brahima and Zlate, Andrei, International Financial Spillovers to Emerging Market Economies: How Important are Economic Fundamentals? (2015-04-22). FRB International Finance Discussion Paper No. 1135. Available at SSRN: https://ssrn.com/abstract=2671043 or http://dx.doi.org/10.2139/ssrn.2671043

Shaghil Ahmed (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC
United States

Brahima Coulibaly

Board of Governors of the Federal Reserve System - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Andrei Zlate

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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