Determinants of Emerging Market Crises: The Role of U.S. Monetary Policy
46 Pages Posted: 27 Jul 2016 Last revised: 3 Aug 2016
Date Written: July 26, 2016
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: Suggested Citation