Index Investing News
Saturday, May 10, 2025
No Result
View All Result
  • Login
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
No Result
View All Result
Index Investing News
No Result
View All Result

US interest rate increases and crisis probabilities in developing economies

by Index Investing News
January 28, 2023
in Economy
Reading Time: 3 mins read
A A
0
Home Economy
Share on FacebookShare on Twitter


All interest rate increases are not created equal. Interest rates can go up due to expectations of improving economic prospects. Alternatively, they can be pushed up by rising inflation expectations. Or they can also increase due to expectations of more aggressive central bank policy. Interest rate increases in advanced economies—especially the United States—can create financial pressures in emerging market and developing economies (EMDEs). Our work indicates that the types of shocks that have driven U.S. interest rates upward during 2022 are especially likely to trigger financial crises in the developing world.

Shocks behind rising U.S. interest rates

In a recent paper, we distinguish between three potential drivers of rising U.S. interest rates:

  • “Real shocks,” which are prompted by improved prospects for U.S. economic activity;
  • “Inflation shocks,” which reflect expectations of rising U.S. inflation;
  • “Reaction shocks,” which reflect investors’ assessments that the Federal Reserve’s reaction function has become more hawkish.

We find that, over the past year, rising U.S. interest rates have been driven mainly by reaction shocks, as the Fed has pivoted toward more aggressive action to rein in inflation (figure 1).

Figure 1. Drivers of two-year U.S. interest rate yields in 2022

Note: Shocks are estimated from a sign-restricted Bayesian vector autoregression (VAR) model with stochastic volatility. Real shocks raise U.S. interest rates, inflation expectations, and equity prices (a proxy for economic prospects). Inflation shocks raise U.S. interest rates and inflation expectations but lower equity prices. Reaction shocks raise U.S. interest rates but lower inflation expectations and equity prices. Figure shows cumulative change in underlying shocks and yields since January 2022.

Rising crisis probabilities in developing countries

We then estimate the impact of these shocks on the probability of EMDE financial crises. We explore three types of financial crises: sovereign debt, banking, and currency. We find that rising U.S. interest rates driven by real shocks lead to small changes in the likelihood of a crisis. In contrast, reaction shocks (the anticipation of more hawkish Fed policy) substantially boost the probability that an EMDE will experience a financial crisis (figure 2).

Figure 2. Impact of increase in 2-year U.S. interest rate yield on EMDE crisis probability

fig 2

Note: Based on results from panel logit model with random effects. “0” indicates the probability of a crisis in a given year when there is no change in the underlying shock and all other variables included in the model are at their sample means. “+0.25%”, “+0.50%”, and “+1.40%” indicate the crisis probabilities in the hypothetical case of 25, 50, and 140 basis point increase in the 2-year U.S. treasury yield driven by the underlying shock.

What is worse, our results suggest that a doubling of the size of the reaction shock leads to a more-than-doubling of the increase in financial crisis probability. An increase of only 25 basis points in U.S. two-year yields driven by a reaction shock raises the probability of a financial crisis in a given EMDE moderately, from 3.5 percent to 6.6 percent. But during 2022, reaction shocks have boosted two-year yields by about 140 basis points, which has resulted in an increase of 51 percentage points in the probability of EMDE financial crisis, to almost 55 percent.

Further increases in U.S. interest rates can result in more widespread currency distress, given the increase in EMDE debt and the depletion of foreign currency reserves that has taken place of late.

More currency crises may lie ahead

The impact of reaction shocks on the probability of a currency crisis is even larger—reaction shocks in 2022 have pushed the likelihood of currency crises to 78 percent. In 2022, seven EMDEs experienced a currency crisis, and 21 EMDEs reached agreements with the IMF for additional financing. Further increases in U.S. interest rates can result in more widespread currency distress, given the increase in EMDE debt and the depletion of foreign currency reserves that have taken place of late.



Source link

Tags: crisisDevelopingeconomiesIncreasesinterestProbabilitiesrate
ShareTweetShareShare
Previous Post

Worst over for global economy, ‘softer recession’ likely: RBI governor

Next Post

15 Personal Growth Questions To Ask Yourself

Related Posts

Donald Trump’s push to make Hollywood nice once more

Donald Trump’s push to make Hollywood nice once more

by Index Investing News
May 10, 2025
0

Over a six-decade profession in Hollywood, Jon Voight has performed an aspiring gigolo (Midnight Cowboy), gained an Oscar for Finest...

Donald Trump indicators openness to reducing China tariffs forward of Geneva talks

Donald Trump indicators openness to reducing China tariffs forward of Geneva talks

by Index Investing News
May 10, 2025
0

Unlock the White Home Watch e-newsletter free of chargeYour information to what Trump’s second time period means for Washington, enterprise...

Caplan’s Expertise of Mainstream Economists and My College students’ Shock

Caplan’s Expertise of Mainstream Economists and My College students’ Shock

by Index Investing News
May 10, 2025
0

  On his Substack, Wager On It, Bryan Caplan at this time posted a section from his latest e-book, Unbeatable....

The Fed wants a “Sturdy” chief.

The Fed wants a “Sturdy” chief.

by Index Investing News
May 10, 2025
0

On the whole, it's assumed that the chair of the Federal Reserve Board is the chief of the Fed. However...

They Took Our Jobs! – Econlib

They Took Our Jobs! – Econlib

by Index Investing News
May 9, 2025
0

The anti-trade protectionists are again in energy, and so they’re promising as soon as once more to “convey again good-paying...

Next Post
15 Personal Growth Questions To Ask Yourself

15 Personal Growth Questions To Ask Yourself

Big Bash League 2022-23 Most Runs and Most Wickets standings: Matthew Short and Sean Abbott lead charts

Big Bash League 2022-23 Most Runs and Most Wickets standings: Matthew Short and Sean Abbott lead charts

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

RECOMMENDED

In India, is a guaranteed funded pension feasible?

In India, is a guaranteed funded pension feasible?

April 2, 2023
Tributes pour in after beloved journalist Patrick Barclay dies

Tributes pour in after beloved journalist Patrick Barclay dies

February 14, 2025
(4/7) Thursday’s Pre-Market Inventory Movers & Information : shares

(4/7) Thursday’s Pre-Market Inventory Movers & Information : shares

April 7, 2022
State Department Hosted Qatari Official Who Praised Hamas Terrorism – FREEDOMBUNKER

State Department Hosted Qatari Official Who Praised Hamas Terrorism – FREEDOMBUNKER

April 3, 2024
Just Listed | 202 Brackenwood Terrace

Just Listed | 202 Brackenwood Terrace

July 6, 2023
Forget mansplaining — transplaining is the woke way for men to talk down to women

Forget mansplaining — transplaining is the woke way for men to talk down to women

August 23, 2023
Opinion – Responsible Business Conduct in Times of War

Opinion – Responsible Business Conduct in Times of War

October 23, 2022
Assume Appropriately or the State Will Punish You

Assume Appropriately or the State Will Punish You

April 24, 2022
Index Investing News

Get the latest news and follow the coverage of Investing, World News, Stocks, Market Analysis, Business & Financial News, and more from the top trusted sources.

  • 1717575246.7
  • Browse the latest news about investing and more
  • Contact us
  • Cookie Privacy Policy
  • Disclaimer
  • DMCA
  • Privacy Policy
  • Terms and Conditions
  • xtw18387b488

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

No Result
View All Result
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In