The impact of expectations of an increase in the US interest rate on emerging markets in 2022: a comparative study of the 2013, 2015, and 2022 episodes

Details

Supervisors

Bodart, Vincent

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale, à finalité spécialisée

Abstract

enThis study seeks to examine the effects of expectations of an increase of the US interest rates on emerging markets in 2022. It consists of a replication of Eichengreen and Gupta (2015), to which they examine the effects of expectations of an increase in the US interest rate in 2013, but for the context of 2022. The thesis makes a historical comparison with the 2013 episode, as well as with 2015, in which in that year the Federal Reserve System (FED) had also made an announcement that made investors to expect an increase in the US interest rates. The thesis replicates the older episodes for a valid comparison (for the 2015 episode, it uses Lombet’s (2021) study, to which she uses Eichengreen and Gupta’s methodology to analyse it). It seeks to examine whether countries, like in their paper, that had a deterioration of the current account deficit, an appreciation to the real exchange rate, and a large financial market in the period that precedes the announcement experienced worse exchange rate depreciation and capital market pressure than countries that did not display these characteristics. The study finds that countries with an appreciation of their real exchange rate prior to the December 15th announcement which started the 2022 episode experienced more depreciation than countries who had a depreciation of their real exchange rate prior to the announcement. Countries that displayed any of the other indicators, a deterioration of the current account deficit and large financial market, did not appear to suffer more. Given how the recent literature discusses how emerging markets have become resilient as of lately, it raised the question as to whether countries were more prepared for this episode. In one way given the insignificant results for the deterioration of the current account deficit and size of the financial market, it may be the case: it may be that countries entered the episode with more reserves and a deeper domestic financial market, yet the real exchange rate result may challenge that. It could be that if countries entered with higher reserves, they may not have been able to fully restore their exchange rate back to equilibrium when reducing the exchange-rate volatility. It is ambiguous. Also, this study attempts to control for the effects of the escalation of the Russia-Ukraine war. The rise in energy and agricultural commodities prices may have altered the effects of the announcement depending on whether a country is a net exporter or importer of one of the commodities. A net exporter in theory would benefit from the increase in prices, and thus experience an alleviated effect of the announcement, while a net importer would suffer from the increase in prices and thus experience a worsened effect of the announcement. Due to apparent data unavailability for a country specific commodity price index, the study was unable to directly introduce the shock to the model. Nevertheless, it does control for whether a country is a net exporter of energy/agricultural commodities (it treats net energy exporters and net agricultural commodities exporters separately), but it does not seem to find differences in financial pressure between net exporters and importers.