Emerging Market Volatility: Lessons from The Taper Tantrum
Staff Discussion Notes, October 2, 2014
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Bibliographic details
- Authors: Ratna Sahay, Athanasios V Arvanitis, Hamid Faruqee, Papa M N'Diaye
- Published: October 2, 2014
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9781498318204.006
Background
- Accommodative monetary policies in advanced economies have spurred increased capital inflows into emerging markets since the global financial crisis.
- Starting in May 2013, when the Federal Reserve publicly discussed its plans for tapering unconventional monetary policies, emerging markets experienced financial turbulence at the same that their domestic economic activity slowed.
- This Staff Discussion Note examines emerging markets' experiences and policy responses and draws broad policy lessons.
Key findings
- Good macroeconomic fundamentals in emerging markets matter for resilience to external shocks.
- Early and decisive measures to strengthen macroeconomic policies and reduce vulnerabilities help dampen market reactions to external shocks.
- Clear and effective communication by advanced economies about the exit from unconventional monetary policy can reduce the risk of excessive market volatility.
- Enhanced global cooperation, including a strong global financial safety net, offers emerging markets effective protection against excessive volatility.
Policy lessons for emerging markets
- Prioritize maintaining good macroeconomic fundamentals.
- Implement early and decisive measures to strengthen macroeconomic policies.
- Reduce vulnerabilities that can amplify market reactions to external shocks.
Policy lessons for advanced economies
- Provide clear and effective communication about plans to exit unconventional monetary policy to help reduce global market volatility.
Global and international policy recommendations
- Enhance global cooperation mechanisms.
- Strengthen the global financial safety net to offer effective protection for emerging markets against excessive volatility.
Source: Staff Discussion Note "Emerging Market Volatility: Lessons from The Taper Tantrum" by Ratna Sahay, Athanasios V Arvanitis, Hamid Faruqee, and Papa M N'Diaye (October 2, 2014).