{
  "title": "Emerging Markets & Volatility: Lessons from the Taper Tantrum",
  "publication": "IMF Blog, December 9, 2014",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2014/12/09/emerging-markets-volatility-lessons-from-the-taper-tantrum",
  "canonical": "https://www.imf.org/en/blogs/articles/2014/12/09/emerging-markets-volatility-lessons-from-the-taper-tantrum",
  "overlayPath": "/en/blogs/articles/2014/12/09/emerging-markets-volatility-lessons-from-the-taper-tantrum/index.md",
  "summary": "Authors: Ratna Sahay, Preya Sharma",
  "sections": [
    {
      "heading": "Context and timing",
      "content": "- Authors: Ratna Sahay, Preya Sharma\n- Date: December 9, 2014\n- Key temporal markers:\n  - May 2013: Fed chair Ben Bernanke began discussing reduction of the Fed’s bond-buying program, triggering the “tapering episode.”\n  - 2015: Expectations of Fed tightening to begin in 2015 shaped forward-looking concerns about global spillovers."
    },
    {
      "heading": "What happened during the tapering episode",
      "content": "- Immediate market reaction in May 2013:\n  - Acute and systemic market volatility.\n  - Emerging markets were hit indiscriminately.\n  - Many emerging markets experienced rapid currency depreciation, higher external financing premia, falling equity prices, and slower capital flows.\n- Subsequent market behavior:\n  - Markets began to differentiate fairly quickly between countries with good fundamentals and those with economic imbalances."
    },
    {
      "heading": "Factors associated with resilience (findings)",
      "content": "- Countries with more subdued market pressures after the initial reaction typically had:\n  - stronger fundamentals\n  - financial systems with more domestic services, products and liquid markets\n  - fewer foreign holders of domestic debt\n  - better growth prospects\n- Definition of “better fundamentals” used in the analysis:\n  - stronger current and fiscal account positions\n  - lower inflation\n  - adequate international reserve buffers\n- Policy environment enhancing resilience:\n  - tighter macroprudential policies prior to the taper talk\n  - capital controls prior to the taper talk"
    },
    {
      "heading": "Recommended policy actions for emerging markets (policy guidance)",
      "content": "- During booms and busts of capital flows, early and decisive action reduces vulnerability:\n  - Raise interest rates where inflation is high.\n  - Intervene in foreign exchange markets when foreign exchange reserves are adequate.\n  - Address current account deficits promptly.\n- Preparedness and institutional resilience:\n  - Strengthen fundamentals continuously.\n  - Build financial systems with deeper domestic services, products, and liquid markets.\n  - Reduce reliance on foreign holders of domestic debt where feasible.\n  - Maintain adequate international reserve buffers.\n  - Implement and maintain appropriate macroprudential frameworks and, where justified, capital flow management measures."
    },
    {
      "heading": "Role of international community and central banks",
      "content": "- International organizations (such as the IMF) should:\n  - Help strengthen the global financial safety net through better cooperation with regional financial arrangements.\n  - Facilitate swap lines between central banks to ensure sufficient liquidity.\n  - Directly provide resources if requested.\n- Advanced-economy central banks and the broader international community should:\n  - Communicate exit from unconventional monetary support clearly and effectively to reduce excessive market volatility.\n  - Note: The Fed’s communication strategy improved after May 2013, contributing to more muted market reactions to the end of U.S. unconventional monetary expansion."
    },
    {
      "heading": "Overall outlook and guidance",
      "content": "- Normalization of monetary policy in the United States and other advanced economies is likely to cause some volatility in global markets.\n- Emerging markets should:\n  - Continue to strengthen fundamentals.\n  - Be prepared for a swift and decisive policy response to eventual market jitters.\n\nSource: Emerging Markets & Volatility: Lessons from the Taper Tantrum (Ratna Sahay, Preya Sharma, December 9, 2014).\n\n---\n\n\n References\n\n- how investors’ differentiate between emerging market countries\n- the impact of volatile markets\n- the factors explaining the slowdown in growth\n- paper\n\nSource: https://www.imf.org/en/blogs/articles/2014/12/09/emerging-markets-volatility-lessons-from-the-taper-tantrum"
    }
  ],
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    "Authors: Ratna Sahay, Preya Sharma",
    "Published: December 9, 2014",
    "Authors: Ratna Sahay, Preya Sharma",
    "Date: December 9, 2014",
    "Key temporal markers:",
    "Immediate market reaction in May 2013:",
    "Subsequent market behavior:",
    "Countries with more subdued market pressures after the initial reaction typically had:",
    "Definition of “better fundamentals” used in the analysis:",
    "Policy environment enhancing resilience:",
    "During booms and busts of capital flows, early and decisive action reduces vulnerability:",
    "Preparedness and institutional resilience:",
    "International organizations (such as the IMF) should:",
    "Advanced-economy central banks and the broader international community should:",
    "Normalization of monetary policy in the United States and other advanced economies is likely to cause some volatility in global markets.",
    "Emerging markets should:",
    "[how investors’ differentiate between emerging market countries](http://www.imf.org/external/pubs/ft/survey/so/2014/POL033114B.htm)",
    "[the impact of volatile markets](http://blogs.imf.org/2014/11/07/portfolio-investment-in-emerging-markets-more-than-just-ebb-and-flow/)",
    "[the factors explaining the slowdown in growth](http://blogs.imf.org/2014/09/18/three-key-questions-about-the-slowdown-in-emerging-markets/)",
    "[paper](http://www.imf.org/external/pubs/cat/longres.aspx?sk=41890.0)"
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