If the Fed Acts, How Do You React? The Liftoff Effect on Capital Flows

IMF Working Papers, December 9, 2015

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Canonical URL: If the Fed Acts, How Do You React? The Liftoff Effect on Capital Flows

After more than six years of ultra-low interest rates, a Fed liftoff (rate hike) is just a matter of time.
The paper examines the spillover effect — termed the "liftoff" effect — of the previous five Fed liftoffs on capital flows.
Findings suggest history may provide guidance for current circumstances despite differences.

The liftoff effect on capital flows (total private, portfolio) is significantly higher for emerging market economies (EM) than advanced market economies (AM).
EM capital flows are hit indiscriminately one quarter before liftoff, suggesting that markets usually price in the liftoff before the actual event.
Over time, there is more variation among EM as policy responses/framework can to some extent dampen market reactions.
The findings are similar to the unfolding of events during the taper tantrum episode.

Subject: Balance of payments, Capital account, Capital flows, Central bank policy rate, Exchange rate stability, Financial services, Foreign exchange, Monetary policy, Monetary policy frameworks
Keywords: Capital account, capital flow, capital flows, Central bank policy rate, emerging market economies, Exchange rate stability, Fed chairman Greenspan, Fed liftoff, Fed liftoffs, fiscal policy, Global, liftoff effect, liftoff variable, Monetary policy frameworks, monetary policy independence, movement vis-à-vis, policy framework, policy responses, policy variable, rate hike, WP

_wp15256 — Section 1–4
- _wp15256 — Section 1–4 (Markdown version)
- _wp15256 — Section 1–4 (PDF)