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Determinants of Emerging Market Crises: The Role of U.S. Monetary Policy

46 Pages Posted: 27 Jul 2016 Last revised: 3 Aug 2016

Robin Koepke

International Monetary Fund

Date Written: July 26, 2016

Abstract

This paper examines the role of U.S. monetary policy in determining the incidence of emerging market crises. A negative binomial count model and a panel logit model are estimated to analyze the determinants of currency crises, banking crises, and sovereign defaults in a group of 27 emerging economies. The estimation results suggest that the probability of crises is substantially higher (1) when the federal funds rate is above its natural level, (2) during Fed policy tightening cycles, and (3) when market participants are surprised by signals that the Fed will tighten policy faster than previously expected. The findings point to a heightened risk of emerging market crises in the coming years as the Fed continues to normalize interest rates.

Keywords: Currency Crises, Banking Crises, Sovereign Default, Emerging Economies, Federal Reserve, Market Expectations

JEL Classification: E43, E52, F34, F41, F42, G01

Suggested Citation

Koepke, Robin, Determinants of Emerging Market Crises: The Role of U.S. Monetary Policy (July 26, 2016). Available at SSRN: https://ssrn.com/abstract=2814544 or http://dx.doi.org/10.2139/ssrn.2814544

Robin Koepke (Contact Author)

International Monetary Fund ( email )

United States

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