Abstract

Since the beginning of 2014, the U.S. Federal Reserve has started to reduce the scale of its bond purchases. Although the Federal Reserve’s stance remains highly expansionary, this “tapering” process marks the first stage in the anticipated normalization of U.S. monetary policy. Given the novelty of the Federal Reserve’s quantitative easing (QE) program, there are many question marks regarding how its unwinding will affect the rest of the world. Repeated bouts of financial market turmoil since May 2013 have raised concerns that sustained increases in U.S. interest rates could destabilize emerging market economies (EMEs) that have benefited from ultra-low external financing costs and received large capital inflows in recent years. This chapter examines how prospective changes in U.S. monetary conditions could affect the Latin American region, focusing in particular on spillovers through trade flows, bond, and foreign exchange markets.

New Challenges to Growth and Stability