Study Finds 4-Point Fed Shift Hit Emerging Markets Unevenly in 2022-23
Updated
Updated · Liberty Street Economics - · Jun 26
Study Finds 4-Point Fed Shift Hit Emerging Markets Unevenly in 2022-23
1 articles · Updated · Liberty Street Economics - · Jun 26
Summary
More vulnerable emerging markets outperformed model forecasts during the 2022-23 U.S. tightening cycle, showing lower-than-expected financial stress and stronger GDP resilience, while less vulnerable peers lagged on growth.
The study ties that divergence to a 4 percentage-point upward shift in expected Fed rates from late 2021 to late 2023, with 2022 driven mainly by inflation concerns as U.S. growth expectations were repeatedly marked down.
Financial outcomes were broadly better than the model predicted for both groups: less vulnerable EMEs saw exchange-rate moves largely in line with forecasts but tighter corporate spreads, while more vulnerable EMEs stayed close to a growth-shock-only path.
The authors say missing external factors such as commodity prices and China’s growth, or policy improvements in riskier EMEs not captured by vulnerability indexes, may explain why actual outcomes diverged from historical-model expectations.