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

Author/Editor:

Rudolfs Bems ; Francesca G Caselli ; Francesco Grigoli ; Bertrand Gruss

Publication Date:

March 28, 2019

Electronic Access:

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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 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.

Series:

Working Paper No. 19/75

Subject:

English

Publication Date:

March 28, 2019

ISBN/ISSN:

9781498302777/1018-5941

Stock No:

WPIEA2019075

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

13

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