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

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  • Mr. Rudolfs Bems
  • Francesca Caselli
  • Mr. Francesco Grigoli
  • Bertrand Gruss

Abstract

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.

Suggested Citation

  • Mr. Rudolfs Bems & Francesca Caselli & Mr. Francesco Grigoli & Bertrand Gruss, 2019. "Gains from Anchoring Inflation Expectations: Evidence from the Taper Tantrum Shock," IMF Working Papers 2019/075, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2019/075
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    Cited by:

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    2. Mr. Pragyan Deb & Julia Estefania-Flores & Melih Firat & Davide Furceri & Siddharth Kothari, 2023. "Monetary Policy Transmission Heterogeneity: Cross-Country Evidence," IMF Working Papers 2023/204, International Monetary Fund.
    3. Antonia López‐Villavicencio & Marc Pourroy, 2022. "Fed's Policy Changes and Inflation in Emerging Markets: Lessons from the Taper Tantrum," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 1099-1121, June.
    4. Lasha Arevadze & Tamta Sopromadze & Giorgi Tsutskiridze & Shalva Mkhatrishvili, 2020. "Identifying the Phillips Curve in Georgia," NBG Working Papers 01/2020, National Bank of Georgia.
    5. Lasha Arevadze & Tamta Sopromadze & Giorgi Tsutskiridze & Shalva Mkhatrishvili, 2020. "Identifying the Phillips Curve in Georgia," NBG Working Papers 01/2020, National Bank of Georgia.

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    More about this item

    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;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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