Effect of the U.S. Fed Reserve Tapering on Five Countries
Effect of US Fed Reserve Tapering on Fragile Five countries
Trimester - 3
Research Paper
Table of Contents
I. Executive Summary
On Dec 18, 2013 The US Federal Reserve declared that it will taper its quantitative easing by $5 Billion each month starting January 2014. This is expected to increase the interest rates in US. With an increase rate of return for investors in US, those who invested in emerging markets expecting higher returns, are pulling out money from these emerging markets.
Morgan Stanley Researcher James Lord identifies five emerging markets namely India, Indonesia, Brazil, South Africa and Turkey, which would be worse hit by this policy of the US Fed. Quoting him from the report published in Aug 2013:
“High inflation, large current account deficits, challenging capital flow prospects, weak emerging market growth and imminent political elections will work against what we call the Fragile Five.”
There are many macroeconomic factors of these countries which have caused their economies to be susceptible to such volatility with changes in the US Fed policy. All these countries have been largely dependent on foreign investments to achieve growth.
This research paper proposes to understand the effect the US Federal Reserve Policy has on Emerging Markets especially the five countries popularly termed as the “Fragile Five”
II. Hypothesis
The US Federal Reserve Policy of tapering Quantitative Easing will have adverse effect on the emerging market economies making them unattractive for foreign investors.
III. Quantitative Easing and Tapering
Since the global financial crisis, the Federal Reserve has used the policy of quantitative easing (QE) to try to revive consumer spending and economic growth. In September 2012 the Fed said it would spend a further $40bn per month.
So let’s try to understand what is quantitative easing. Usually, central banks try to raise the amount of lending and activity in the economy indirectly, by
Trimester - 3
Research Paper
Table of Contents
I. Executive Summary
On Dec 18, 2013 The US Federal Reserve declared that it will taper its quantitative easing by $5 Billion each month starting January 2014. This is expected to increase the interest rates in US. With an increase rate of return for investors in US, those who invested in emerging markets expecting higher returns, are pulling out money from these emerging markets.
Morgan Stanley Researcher James Lord identifies five emerging markets namely India, Indonesia, Brazil, South Africa and Turkey, which would be worse hit by this policy of the US Fed. Quoting him from the report published in Aug 2013:
“High inflation, large current account deficits, challenging capital flow prospects, weak emerging market growth and imminent political elections will work against what we call the Fragile Five.”
There are many macroeconomic factors of these countries which have caused their economies to be susceptible to such volatility with changes in the US Fed policy. All these countries have been largely dependent on foreign investments to achieve growth.
This research paper proposes to understand the effect the US Federal Reserve Policy has on Emerging Markets especially the five countries popularly termed as the “Fragile Five”
II. Hypothesis
The US Federal Reserve Policy of tapering Quantitative Easing will have adverse effect on the emerging market economies making them unattractive for foreign investors.
III. Quantitative Easing and Tapering
Since the global financial crisis, the Federal Reserve has used the policy of quantitative easing (QE) to try to revive consumer spending and economic growth. In September 2012 the Fed said it would spend a further $40bn per month.
So let’s try to understand what is quantitative easing. Usually, central banks try to raise the amount of lending and activity in the economy indirectly, by
Bibliography: [14] Feb 2014 Issue, “Locus of Extremity”, The Economist [15] Brian Winter and Silvio Cascione, March 12, 2014, “Brazil’s economy faces trouble”, www.reuters.com/article/