Gains from anchoring inflation expectations: Evidence from the taper tantrum shock

Have improvements in monetary policy frameworks increased emerging market resilience to external shocks? This paper exploits the May 2013 taper tantrum episode 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 find 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 and higher inflation. These findings suggest that gains in inflation expectations' anchoring can improve central bank's policy trade-offs when facing external shocks. (C) 2019 International Monetary Fund. Published by Elsevier B.V. All rights reserved.