Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/123742
Authors: 
Dahlhaus, Tatjana
Vasishtha, Garima
Year of Publication: 
2014
Series/Report no.: 
Bank of Canada Working Paper 2014-53
Abstract: 
The Federal Reserve's path for withdrawal of monetary stimulus and eventually increasing interest rates could have substantial repercussions for capital flows to emerging-market economies (EMEs). This paper examines the potential impact of U.S. monetary policy normalization on portfolio flows to major EMEs by using a vector autoregressive model that explicitly accounts for market expectations of future monetary policy. The "policy normalization shock" is defined as a shock that increases both the yield spread of U.S. long-term bonds and monetary policy expectations while leaving the policy rate per se unchanged. Results indicate that the impact of this shock on portfolio flows as a share of GDP is expected to be economically small. The estimated impact is closely in line with that seen during the end-May to August 2013 episode in response to a comparable rise in the yield spread of U.S. long-term bonds. However, as the events during the summer of 2013 have shown, relatively small changes in portfolio flows can be associated with significant financial turmoil in EMEs. Further, there is also a strong association between the countries that are identified by our model as being the most affected and the ones that saw greater outflows of portfolio capital over May to September 2013.
Subjects: 
International topics
Transmission of monetary policy
JEL: 
C32
E52
F33
F42
Document Type: 
Working Paper

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