Global tightening, banking stress and market resilience in EMEs

BIS Papers  |  No 134  | 
18 April 2023

Market functioning in emerging market economies (EMEs) can easily be buffeted by spillovers from advanced economies. The taper tantrum is a prime example. In the light of this historical experience, this paper assesses how market functioning in EMEs evolved amidst the tightening cycles in major advanced economies that started in 2022 and during the banking problems in the United States and Switzerland in March 2023. We find that core markets in EMEs were resilient relative to previous market dysfunction episodes and there was no widespread market dysfunction in 2022 or 2023. Nevertheless, liquidity conditions in FX and government bond markets deteriorated and were similar to, or in cases worse than, previous episodes. But strained liquidity was a global phenomenon in 2022 and March 2023 in the context of elevated volatility. And liquidity conditions in fixed income markets were even worse in advanced economies than in emerging market economies. EME resilience seems to reflect a range of conjunctural and structural factors.

JEL classification: F36, G10, G15

Keywords: market functioning, international spillovers, emerging markets