Capital flow reversals during the taper tantrum in 2013: causes and consequences

Abstract

Quantitative easing (QE) conducted by the US Fed during 2009 Q1 to 2013 Q2 expanded capital flows into emerging economies. The possibility of tapering to reduce QE caused the taper tantrum in 2013 that was characterized by sudden capital reversals and drastic exchange rate depreciation in a subset of developing countries. In this paper we investigated factors that drove capital reversals and drastic exchange rate depreciation in the developing countries. We find that actual capital inflows during the QE periods were most responsible for capital reversals thereafter. However, we do not find evidence that capital flow reversals actually contributed to the drastic exchange rate depreciation during the taper tantrum or lowered real GDP growth afterwards. Consistent with previous studies Our findings suggest that pre-emptive measures to prevent excessive capital inflows are crucial to promote the resilience of the economy. The recent experience of Korea that introduced a series of macroprudential measures shows supporting evidence for this view.