The impact of the tapering off policy by the United States on the financial fluctuations of developing countries

Abstract

In the summer of 2013 fluctuations in financial markets significantly increased, after the Fed announced it would increase interest rates to curb inflation. Financial market participants revised their expectations about when the Fed will start normalizing monetary policy. This study aims to analyze the impact of the tapering off policy of the United States on financial fluctuations of developing countries (Indonesia, Brazil, India, South Africa, and Turkey) using the VAR (Vector Autoregression) method. US tapering off policy refers to returning interest rates to more normal levels after a period of expansionary monetary stimulus. Financial fluctuations in developing countries may be affected by the normalization of US monetary policy through US interest rate hike channels that can attract capital from developing countries, causing exchange rate depreciation and increased financial market volatility. The research method used in this study is VAR analysis. The VAR model will be used to analyze how US tapering off policy might affect the dynamics of those variables in developing countries. The results of the study are expected to provide a better understanding of the impact of US tapering off policy on financial fluctuations in developing countries. The policy implications of this study can assist governments and financial institutions in formulating appropriate policies to address potential risks and manage financial stability in developing countries exposed to the impact of US tapering off policies.