It is my 200th blog on EconMacro, let me enjoy this opportunity to announce that I am now an External Consultant at the Asian Development Bank. Let me add that I published my first working paper for ADB.
The Performance of Emerging Markets During the Fed’s Easing and Tightening Cycles: A Resilience Analysis Across Economies by Aizenman, Joshua; Park, Donghyun; Qureshi, Irfan; Saadaoui, Jamel; Uddin, Gazi Salah, ADB Economics Working Paper No. 735
This study investigates the determinants of emerging markets performance during five United States Federal Reserve monetary tightening and easing cycles from 2004 to 2023. It shows how macroeconomic and institutional variables are associated with emerging markets’ performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Findings are largely consistent with economic intuition, i.e., current account balance, international reserves, and inflation are all important determinants of emerging markets resilience.
Identification is done by analyzing the cycle dates for tightening and easing cycles of the US monetary policy. Thanks to graphical evidence, we identify 5 US monetary cycles, Before the GFC, the GFC, the Taper Tantrum, the COVID-19 cycle, and the recent cycle. Using cross-sectional regressions, we analyze cross-section resilience for three macro-financial variables: the bilateral exchange rate against the USD, the Exchange Rate Market Pressure (EMP) index by Krogstrup and Goldberg (2023), and the country-specific MSCI index in local currency. The cross-section regressions use ex-ante macroeconomic and institutional fundamentals. Ex-ante means observed 12 months before each monetary cycle. Then, we stack the cross-sections to run pseudo-panel regressions. Thanks to interaction terms with institutional variables, we discover that government stability is associated with lower performance during easing and with higher resilience during tightening cycles. These results are confirmed with panel quantile regressions. Rey (2015) illustrates that US monetary cycles increasingly affect economic and financial performance in the rest of the world, especially in emerging countries. Our work reveals that the benefits of building sound institutions and maintaining good economic performances are mostly visible only during tightening cycles. Panel analyzes that conflate easing and tightening cycles assume symmetric effects of ex-ante fundamentals and institutions. Our work provides empirical evidence demonstrating that these effects are not symmetric. On a lighter note, our work may illustrate Warren Buffett’s famous metaphor “A rising tide floats all boats… only when the tide goes out do you discover who’s been swimming naked.”
