The Coming US Interest Rate Tightening Cycle: Smooth Sailing or Stormy Waters?

Abstract

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Economic Fundamentals and Monetary Policy Autonomy

“…Although Aizenman, Binici, and Hutchison (2014) finds the opposite. In line with the subject of this paper, Arteta, Kose, Ohnsorge, Stocker, et al (2015) argue that economic fundaments were important part of the policy response to the taper tantrum. In the next section we will show how the emerging markets with current account deficits were the ones that were most likely to raise interest rates after the first suggestion of Fed tapering.…”

The Global Role of the U.S. Economy: Linkages, Policies and Spillovers

“…A panel vector autoregression model is used to analyze the differentiated effects on EMDEs of "real" and "monetary" shocks driving U.S. long-term bond yields (Arteta et al 2015).…”

“…13 An adverse monetary shock is assumed to increase long term yields and reduce stock prices in the United States, while a favorable real shock is assumed to increase both long-term yields and stock prices in the United States. The decomposition is derived from a structural vector autoregression with sign restrictions (Arteta et al 2015). A.B.C.…”

“…These results are derived from a vector autoregression model including capital flows to EMDEs (foreign direct investment, portfolio investment, and other investment as a share of GDP), quarterly real GDP growth in EMDEs and G4 countries, real G4 short-term interest rates, G4 term spread, and the VIX index of implied volatility of U.S. S&P 500 options (Arteta et al 2015).…”

Slowdown in Emerging Markets: Rough Patch or Prolonged Weakness?

“…Faced with rising financing cost and currency risk, however, investors are likely to increasingly differentiate among country prospects and vulnerabilities. For example, both during the financial market turmoil of May-June 2013 and during the broad-based U.S. dollar appreciation since mid-2014, exchange rates depreciated sharply against the U.S. dollar in the more vulnerable EM and in those with weaker growth prospects, in particular commodity exporters (Arteta et al 2015).…”