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

IMF Working Papers, March 28, 2019

Source details

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

The 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.
Main conclusion: 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.
Policy implication highlighted: 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.

Sample and shock:
- Shock: May 2013 taper tantrum in the United States.
- Sample: 18 large emerging markets.
Primary empirical findings:
- Tapering announcement negatively affected growth prospects in all countries in the sample, regardless of the degree of anchoring.
- Countries with weakly anchored inflation expectations experienced larger exchange rate pass-through to consumer prices and therefore higher inflation relative to better-anchored peers.
Subject coverage and keywords (as listed):
- Consumer prices, Emerging and frontier financial markets, Exchange rate pass-through, Exchange rates, Financial markets, Foreign exchange, Inflation, Prices.
- Keywords include: consumer price index to the taper tantrum shock, consumer price inflation response, exchange rate pass-through, Inflation Expectations, Taper Tantrum, taper tantrum episode, taper tantrum shock.

Strengthen inflation-expectations anchoring in emerging markets to:
- Reduce exchange rate pass-through to consumer prices following external shocks.
- Ease the policy trade-off faced by central banks when external shocks weaken growth prospects and trigger currency depreciations.
Implied priority for monetary frameworks:
- Continue improvements in monetary policy frameworks that enhance credibility and anchoring of expectations.