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Gains from Anchoring Inflation Expectations: Evidence from the Taper Tantrum Shock
Author:
Mr. Rudolfs Bems
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,
Francesca G Caselli
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,
Mr. Francesco Grigoli
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, and
Bertrand Gruss null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 075
Language:
English
Publication Date:
28 Mar 2019
DOI:
https://doi.org/10.5089/9781498302777.001
ISBN:
9781498306058
ISSN:
1018-5941
Pages:
13
Keywords:
WP; inflation expectation; Inflation Expectations; Taper Tantrum; Exchange Rate Pass-Through.; Fed chairman Bernanke; consumer price inflation response; exchange rate pass-through; consumer price index to the taper tantrum shock; Inflation; Exchange rate pass-through; Exchange rates; Consumer prices; Emerging and frontier financial markets; Global; taper tantrum shock; Ination expectation; taper tantrum episode
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Many argue that improvements in monetary policy frameworks in emerging market economies over the past few decades, have made them more resilient to external shocks. This paper exploits the May 2013 taper tantrum in the United States to study the reaction of 18 large emerging markets to an external shock, conditioning on their degree of inflation expectations' anchoring. We find that while the tapering announcement negatively affected growth prospects regardless of the level of anchoring, countries with weakly anchored inflation expectations experienced larger exchange rate pass-through to consumer prices, hence comparatively higher inflation. We conclude that efforts to improve the extent of anchoring of inflation expectations in emerging markets pay off, as they ease the trade-off that central banks face when external shocks weaken growth prospects and trigger currency depreciations.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund