## Emerging Markets & Volatility: Lessons from the Taper Tantrum

_IMF Blog, December 9, 2014_

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## Bibliographic details
- Authors: Ratna Sahay, Preya Sharma
- Published: December 9, 2014

---

### Context and timing
- Authors: Ratna Sahay, Preya Sharma
- Date: December 9, 2014
- Key temporal markers:
  - May 2013: Fed chair Ben Bernanke began discussing reduction of the Fed’s bond-buying program, triggering the “tapering episode.”
  - 2015: Expectations of Fed tightening to begin in 2015 shaped forward-looking concerns about global spillovers.

### What happened during the tapering episode
- Immediate market reaction in May 2013:
  - Acute and systemic market volatility.
  - Emerging markets were hit indiscriminately.
  - Many emerging markets experienced rapid currency depreciation, higher external financing premia, falling equity prices, and slower capital flows.
- Subsequent market behavior:
  - Markets began to differentiate fairly quickly between countries with good fundamentals and those with economic imbalances.

### Factors associated with resilience (findings)
- Countries with more subdued market pressures after the initial reaction typically had:
  - stronger fundamentals
  - financial systems with more domestic services, products and liquid markets
  - fewer foreign holders of domestic debt
  - better growth prospects
- Definition of “better fundamentals” used in the analysis:
  - stronger current and fiscal account positions
  - lower inflation
  - adequate international reserve buffers
- Policy environment enhancing resilience:
  - tighter macroprudential policies prior to the taper talk
  - capital controls prior to the taper talk

### Recommended policy actions for emerging markets (policy guidance)
- During booms and busts of capital flows, early and decisive action reduces vulnerability:
  - Raise interest rates where inflation is high.
  - Intervene in foreign exchange markets when foreign exchange reserves are adequate.
  - Address current account deficits promptly.
- Preparedness and institutional resilience:
  - Strengthen fundamentals continuously.
  - Build financial systems with deeper domestic services, products, and liquid markets.
  - Reduce reliance on foreign holders of domestic debt where feasible.
  - Maintain adequate international reserve buffers.
  - Implement and maintain appropriate macroprudential frameworks and, where justified, capital flow management measures.

### Role of international community and central banks
- International organizations (such as the IMF) should:
  - Help strengthen the global financial safety net through better cooperation with regional financial arrangements.
  - Facilitate swap lines between central banks to ensure sufficient liquidity.
  - Directly provide resources if requested.
- Advanced-economy central banks and the broader international community should:
  - Communicate exit from unconventional monetary support clearly and effectively to reduce excessive market volatility.
  - 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.

### Overall outlook and guidance
- Normalization of monetary policy in the United States and other advanced economies is likely to cause some volatility in global markets.
- Emerging markets should:
  - Continue to strengthen fundamentals.
  - Be prepared for a swift and decisive policy response to eventual market jitters.

*Source: Emerging Markets & Volatility: Lessons from the Taper Tantrum (Ratna Sahay, Preya Sharma, December 9, 2014).*

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## References

- [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)

_Source: https://www.imf.org/en/blogs/articles/2014/12/09/emerging-markets-volatility-lessons-from-the-taper-tantrum_