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

Rudolfs Bems, Bertrand Gruss, Francesco Grigoli () and Francesca Caselli

No 2019/075, IMF Working Papers from International Monetary Fund

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 fi nd 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.

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 (search for similar items in EconPapers)
Pages: 13
Date: 2019-03-28
New Economics Papers: this item is included in nep-mac and nep-mon
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