Gains from Anchoring Inflation Expectations: Evidence from the Taper Tantrum Shock

By Rudolfs Bems, Francesca Caselli, Francesco Grigoli, Bertrand Gruss

March 28, 2019

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Rudolfs Bems, Francesca Caselli, Francesco Grigoli, and Bertrand Gruss. Gains from Anchoring Inflation Expectations: Evidence from the Taper Tantrum Shock, (USA: International Monetary Fund, 2019) accessed December 21, 2024

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.

Summary

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.

Subject: Consumer prices, Emerging and frontier financial markets, Exchange rate pass-through, Exchange rates, Financial markets, Foreign exchange, Inflation, Prices

Keywords: Consumer price index to the taper tantrum shock, Consumer price inflation response, Consumer prices, Emerging and frontier financial markets, Exchange rate pass-through, Exchange rate pass-through, Exchange Rate Pass-Through., Exchange rates, Fed chairman Bernanke, Global, Ination expectation, Inflation, Inflation expectation, Inflation Expectations, Taper Tantrum, Taper tantrum episode, Taper tantrum shock, WP

Publication Details

Pages:

13
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/075
Stock No:

WPIEA2019075
ISBN:

9781498302777
ISSN:

1018-5941

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