European Parliament Library

If the Fed Acts, How Do You React? The Liftoff Effect on Capital Flows, Swarnali Hannan

Abstract
After more than six years of ultra-low interest rates, a Fed liftoff (rate hike) is just a matter of time. This paper goes back to history to understand the spillover effect – or what is termed in the paper as the ‘liftoff’ effect – of the previous five Fed liftoffs on capital flows. Using a dynamic panel framework covering 48 countries (27 advanced economies, 21 emerging markets) over the period 1982-2006, the paper shows that the liftoff effect on capital flows (total private, portfolio) is significantly higher for emerging market economies (EM) than advanced market economies (AM). EM capital flows are hit indiscriminately one quarter before liftoff, suggesting that markets usually price in the liftoff before the actual event. Over time, there is a bit more variation among EM as policy responses/framework can to some extent dampen market reactions. The findings are similar to the unfolding of events during the taper tantrum episode indicating that, even though current circumstances are very different, history could still provide a good guidance
Table Of Contents
Cover -- Contents -- Abstract -- I. INTRODUCTION -- II. THE LIFTOFF EFFECT OF THE U.S. RATE -- A. Empirical Strategy -- Step 1: The Generic Model for Capital Flows -- Step 2: The Saturated Model Introducing Liftoff Effects -- Step 3: The Restricted Model from the Saturated Model -- Robustness Checks -- B. Results -- Model Results -- Using Model Results to Get a Sense of Magnitude -- C. Why a Liftoff Effect Prior to Liftoff? -- III. THE LIFTOFF EFFECT OF DOMESTIC POLICIES -- A. The Policies -- B. Empirical Strategy -- C. Results -- D. Can Policies Mitigate the Negative Liftoff Effect of the U.S. Rate? -- The Estimated Extra Impact on Capital Flows during Liftoff Episodes due to One Standard Deviation Shock in Each Variable -- The Estimated Extra Impact during Liftoff Episodes using Average Values of Each Variable -- IV. CONCLUDING THOUGHTS -- V. REFERENCES -- VI. FIGURES -- VII. TABLES -- VIII. APPENDIX
Language
eng
Literary Form
non fiction
Physical Description
1 online resource (40 pages)
Specific Material Designation
remote
Form Of Item
online
Isbn
9781513569734

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