“A rising tide floats all boats… Only when the tide goes out do you discover who’s been swimming naked.” The role of institution quality may be hidden during monetary easing. Large episodes of financial and economic stress may reveal the importance of good institutions.
Warren Buffett (1994)
NEW WORKING PAPER: We investigate the determinants of emerging markets performance during five U.S. Federal Reserve monetary tightening and easing cycles during 2004–2023. We study how macroeconomic and institutional conditions of an Emerging Market (EM) at the beginning of a cycle explain EM resilience during each cycle. More specifically, our baseline cross-sectional regressions examine how those conditions affect three measures of resilience, namely bilateral exchange rate against the USD, exchange rate market pressure, and country-specific Morgan Stanley Capital International index (MSCI). We then stack the five cross-sections to build a panel database to investigate potential asymmetry between tightening versus easing cycles. Our evidence indicates that macroeconomic and institutional variables are associated with EM performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Our specific findings are largely consistent with economic intuition. For instance, we find that current account balance, international reserves, and inflation are all important determinants of EM resilience.
You are welcome to download, share, or comment on the following working paper:
- Joshua Aizenman, Donghyun Park, Irfan A. Qureshi, Gazi Salah Uddin, Jamel Saadaoui (2024), The Performance of Emerging Markets During The Fed’s Easing and Tightening Cycles: A Cross-Country Resilience Analysis. NBER Working Paper Series, 32303, https://www.nber.org/papers/w32303
