THE flow of troubling news
out of emerging markets is picking up. Equity indices around Asia
continued their recent losing streak this morning. Though India has
borne the brunt of recent market punishment—the rupee's epic slide has
continued this week—there is plenty of pain to go around. Indonesian
stocks have tumbled more than 10% over the past few days. Growth is
cratering around the region.
Most news stories relate the carnage to anticipated changes
in Federal Reserve policy: "tapering", which may begin in September or
October, of the pace of stimulative asset purchases. But why should that
matter?
Large-scale asset purchases, or quantitative
easing (QE), are generally described as working through several
channels. One is an expectations channel. Purchases may help communicate
central bank goals or increase policy credibility. Purchases can have a
fiscal effect; by lowering expected government borrowing costs QE may
reduce expectations of future taxation, encouraging more work and
investment in the present. Read more...
