ABSTRACT
Global investors became nervous in the summer of 2017 in the face of discussion about tightening monetary policy in the United States and European Union. At the center of investor concern was the fear that tighter policy in the U.S. would spark a substantial outflow of capital from emerging markets. Large and sustained capital outflows would force governments in emerging market economies to raise interest rates, erode their accumulated foreign exchange reserves, and possibly spark currency crises and broader balance-of-payments crises. Such fears arose in the summer of 2017 because memories of the way markets reacted to the U.S. decision to tighten monetary policy in 2013 and 2014 remained fresh. In that period, stock markets in emerging economies fell and interest rates rose sharply as investors shifted back into dollar-denominated assets in response to rising interest rates in the U.S. The episode angered many emerging market policymakers, who accused the Federal Reserve of showing little concern for how its policy affected emerging market economies.
