The Effect of Fed’s Future Policy Expectations on Country Shares in Emerging Market Portfolio Flows

The Effect of Fed’s Future Policy Expectations on Country Shares in Emerging Market Portfolio Flows

18/09

Zelal Aktaş, Yasemin Erduman, Neslihan Kaya Ekşi

English

March 2018

We analyze how changes in market expectations about the Federal Reserve’s future monetary policy stance affect an emerging country’s share in total portfolio flows to emerging markets. We estimate a seemingly unrelated regression model for a panel of 19 emerging countries, using monthly data from January 2010 to October 2017. Our findings suggest that the effect of Fed’s policy expectations on the country share is asymmetric. The expectations of Fed’s monetary policy is found to reduce an emerging country’s share in total emerging market portfolio flows when expectations imply a policy tightening, while easing expectations do not have a significant effect on the share. A country with stronger financial conditions and safer business environment for international investors tend to downsize the negative effect of Fed’s policy tightening on its share in total portfolio flows, with respect to its counterparts.

Fed expectations, Capital flows, Emerging markets, Panel regression

E43; F32; F41; G11