IMF Urges Clear Communication to Avoid ‘Taper Tantrum’ Repeat

Central bankers in advanced economies must clearly communicate their plans to unwind monetary stimulus to avoid a repeat of the volatility unleashed in emerging markets last year, International Monetary Fund staff said.

“Surprises about the future course of monetary policy in major advanced economies have particularly strong effects on emerging-market asset prices and capital flows,” fund staff said in a report released today. “It is therefore important for advanced-economy central banks to provide clear communication and adequate market guidance.”

Comments by former Federal Reserve Chairman Ben Bernanke in May 2013 about the possibility of the central bank winding down its bond-buying program triggered a sell-off in currencies and assets in emerging markets. The correction came to be known as the “taper tantrum,” in reference to the Fed’s plan to reduce its bond purchases.

Economies with weak fundamentals, such as elevated current-account deficits, high inflation and weak growth prospects, would be most vulnerable to another round of volatility, according to the Washington-based lender.

Policy makers should also consider increasing the number of swap-line agreements between central banks to access funds to reduce the risk of volatility, IMF staff said.

They also said that “decisive policy action” to correct economic weaknesses had also been rewarded by financial markets, citing the steps taken by India and Indonesia to strengthen their current-account positions as good examples.

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