Is the Fed to blame for Emerging Market crises?

A recent study by the Institute of International Finance finds that the US Federal Reserve (Fed) and its monetary policy is to blame for crises in emerging markets rather than the developing countries themselves.

US monetary policy “is often just as important as domestic factors in explaining the incidence of EM crises, if not more important,” said Robin Koepke, a senior economist and the author of the report.

The report examined 154 crises in emerging market countries between 1973 and 2014 including currency devaluations, sovereign defaults, and banking crises. The results showed that the number of crises increased directly after the Fed funds effective rate rose.

“Right now, what the market is pricing in is an extremely shallow path of tightening, substantially below what the Fed is saying their tightening intentions are. If the Fed were to raise interest rates at a more normal pace and more rapidly than expected, that would have a significant market impact," said Koepke.