Abstract: The Federal Reserve has hiked interest rates in the most aggressive way in 40 years starting from the year of 2022, while emerging economies as a whole have proven to be highly resilient. According to a study of data from 25 emerging economies and a look into history, we found that not every Fed rate rise was accompanied by an emerging market crisis. Dramatic changes in capital flows, particularly in the banking sector, would hit emerging markets more dramatically, being the most critical factor in triggering a crisis. During the Fed’s current rate hiking cycle, the overall amount of bank capital inflows to emerging markets has remained at a high level, absent of any significant plunge or reversal. Our analysis suggests three reasons for this phenomenon: first, financial regulatory reform introduced after the global financial crisis; second, the overall monetary policy stance of the Federal Reserve; and third, the hedging effect of China.
