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

December 9, 2015

Preview Citation

Format: Chicago

Swarnali A Hannan. If the Fed Acts, How Do You React? The Liftoff Effect on Capital Flows, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

After more than six years of ultra-low interest rates, a Fed liftoff (rate hike) is just a matter of time. This paper goes back to history to understand the spillover effect – or what is termed in the paper as the ‘liftoff’ effect – of the previous five Fed liftoffs on capital flows. Using a dynamic panel framework covering 48 countries (27 advanced economies, 21 emerging markets) over the period 1982-2006, the paper shows that 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 a bit 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 indicating that, even though current circumstances are very different, history could still provide a good guidance.

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

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/256
Stock No:

WPIEA2015256
ISBN:

9781498367196
ISSN:

1018-5941

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