Why Emerging Markets Must Remain Wary of Taper Tantrum 2.0

By Kavaljit Singh | Briefing Paper # 46 | September 24, 2021

On September 22, the US Federal Reserve signaled plans to start reducing its large-scale asset purchases – a process known as tapering – this year and hinted at raising interest rates as early as next year. What does the normalization of monetary policies in the US and major advanced economies mean for emerging markets and developing economies? Would it trigger another massive sell-off in EMDEs, similar to taper tantrum 1.0 of 2013? How worried should EMDEs be about a potential taper tantrum 2.0 in 2021-22? What are their debt and financial vulnerabilities? Which are the “fragile fifteen” countries? Could they weather a taper tantrum 2.0? What should be an appropriate policy response by EMDEs to deal with large capital outflows that produce significant currency depreciation, asset price deflation, and inflationary pressures?

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