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

Author

Listed:
  • Antonia López-Villavicencio

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Marc Pourroy

    (CRIEF [Poitiers] - Centre de recherche sur l'intégration économique et financière - UP - Université de Poitiers = University of Poitiers)

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," Post-Print hal-03134473, HAL.
    • Handle: RePEc:hal:journl:hal-03134473
    DOI: 10.1111/jmcb.12803
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