The Impact of Reducing Quantitative Easing Program on Emerging Markets

Emrah Eray Akça, Ömer Demir, Erkut Düzakın

Abstract


This study aims to analysis the impact of the official announcement of strategies of Fed to exit from the quantitative easing programs on the currencies of emerging market economies  employing event study approach. In this context, daily nominal exchange rate data for the period of 01.09.2012 - 07.04.2014 belonging to selected emerging markets Brazil, India, Hungary, Mexico, South Africa, Philippines, Russia, Thailand and Turkey is used. As a result of the analysis, a statistically significant change was detected between pre-event and post-event sample averages in all countries except Hungary. Accordingly, the Fed's announcement that it will reduce asset purchases resulted in a depreciation in local currencies of investigated emerging markets. These results indicate that Fed's non-traditional monetary policy practices have appeared as a risk factor for global financial markets, particularly in emerging market economies. The countries concerned, therefore, should take necessary preventive measures to reduce the exchange rate fluctuations arising from Fed’s aforesaid practices.


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