Learning to Listen? Fed Communication, Global Risk Sentiment, and Emerging Market Capital Flows

Abstract

This paper examines the relationship between Federal Open Market Committee (FOMC) communication surprises, global risk sentiment, and net portfolio debt inflows to twelve major emerging market economies over the period 2000–2024. Exploiting a high-frequency U.S. Monetary Policy Event-Study Database, we estimate panel fixed-effects regressions and local projections at quarterly frequency. We find that global risk sentiment, proxied by the VIX, is a robust and persistent driver of emerging market capital flows, while Fed communication surprises are statistically insignificant in normal times and in the 2022–2024 tightening cycle. A striking exception is the 2013 taper tantrum—the episode of severe capital outflow pressure triggered by Chairman Bernanke’s May 2013 congressional testimony signalling a possible tapering of asset purchases. Regime interaction tests reveal a large, highly significant negative effect of communication surprises on flows during this episode alone, with no comparable effect in 2022. Local projections confirm that the taper tantrum generated a sharp initial outflow followed by partial reversal, while VIX effects are contemporaneous but not persistent. We empirically test for market learning, finding that reduced sensitivity to Fed communication reflects a discrete recalibration after the 2013 shock rather than a gradual learning process. Regarding capital flows, the taper tantrum is clearly the exception, not the rule.