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Fed's Policy Changes and Inflation in Emerging Markets: Lessons from the Taper Tantrum

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  • ANTONIA LÓPEZ‐VILLAVICENCIO
  • MARC POURROY

Abstract

We use the taper tantrum to measure the effects of a sudden depreciation of the exchange rate. We treat this announcement in the United States of America as an exogenous shock in emerging markets and use a difference‐in‐differences approach. We show that, before the tantrum, the impact of exchange rate changes on inflation is low in both the control and the treatment groups. However, the tantrum increased the gap between groups and impacted inflation regardless of the exchange rate regime or central bank practices. Nevertheless, inflation in economies with flexible exchange rate, inflation target, or highly credible central bank is less exposed to depreciations.

Suggested Citation

  • Antonia López‐Villavicencio & Marc Pourroy, 2022. "Fed's Policy Changes and Inflation in Emerging Markets: Lessons from the Taper Tantrum," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 1099-1121, June.
    • Handle: RePEc:wly:jmoncb:v:54:y:2022:i:4:p:1099-1121
    DOI: 10.1111/jmcb.12803
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