Advanced Search
MyIDEAS: Login to save this paper or follow this series

Globalisation, pass-through and the optimal policy response to exchange rates

Contents:

Author Info

  • Michael B Devereux
  • James Yetman

Abstract

In this paper we examine how monetary policy should respond to nominal exchange rates in a New Keynesian open economy model that allows for a non-trivial role for sterilised intervention. The paper develops the argument against the backdrop of the evolving policy-making environment of Asian economies. Sterilised intervention can be a potent tool that offers policymakers an additional degree of freedom in maximising global welfare. We show that the gains to sterilised intervention are greater when goods market integration is low and exchange rate pass-through is high. However, increased financial internationalisation reduces the effectiveness of sterilised intervention, as the international policy trilemma becomes more relevant. Unsterilised intervention may also have a role to play, although the potential welfare gains from this are generally smaller. Most central banks in Asia have actively used sterilised foreign exchange intervention as a policy tool to smooth exchange rates. But, over time, declining exchange rate pass-through and the increasing international integration of financial and goods markets will tend to reduce the efficacy of sterilised intervention. Given the limited effectiveness of unsterilised intervention, our model implies that the role of exchange rate movements in the optimal setting of monetary policy in Asia is decreasing.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bis.org/publ/work450.pdf
File Function: Full PDF document
Download Restriction: no

File URL: http://www.bis.org/publ/work450.htm
Download Restriction: no

Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 450.

as in new window
Length: 31 pages
Date of creation: Jun 2014
Date of revision:
Handle: RePEc:bis:biswps:450

Contact details of provider:
Postal: Centralbahnplatz 2, CH - 4002 Basel
Phone: (41) 61 - 280 80 80
Fax: (41) 61 - 280 91 00
Email:
Web page: http://www.bis.org/
More information through EDIRC

Related research

Keywords: globalisation; foreign exchange intervention; exchange rate pass-through;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Eduardo Moron & Diego Winkelried, 2002. "Monetary Policy Rules for Financially Vulnerable EconomieEd," Macroeconomics, EconWPA 0205001, EconWPA.
  2. Michael B. Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility," NBER Working Papers 7665, National Bureau of Economic Research, Inc.
  3. Cook, David & Devereux, Michael B., 2006. "External currency pricing and the East Asian crisis," Journal of International Economics, Elsevier, Elsevier, vol. 69(1), pages 37-63, June.
  4. Alan Sutherland, 2002. "Incomplete Pass-Through and the Welfare Effects of Exchange Rate Variability," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 200212, Department of Economics, University of St. Andrews.
  5. Michael B. Devereux & James Yetman, 2013. "Capital Controls, Global Liquidity Traps and the International Policy Trilemma," NBER Working Papers 19091, National Bureau of Economic Research, Inc.
  6. Tony Cavoli & Ramkishen S. Rajan, 2006. "Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization ," Asian Economic Journal, East Asian Economic Association, East Asian Economic Association, vol. 20(4), pages 409-423, December.
  7. Alice Ouyang & Ramkishen Rajan, 2011. "Reserve accumulation and monetary sterilization in Singapore and Taiwan," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 43(16), pages 2015-2031.
  8. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does financial globalization promote risk sharing?," Journal of Development Economics, Elsevier, Elsevier, vol. 89(2), pages 258-270, July.
  9. Giancarlo Corsetti & Paolo Pesenti, 2001. "International Dimensions of Optimal Monetary Policy," NBER Working Papers 8230, National Bureau of Economic Research, Inc.
  10. Yan Bai & Jing Zhang, 2009. "Financial Integration and International Risk Sharing," Working Papers, Research Seminar in International Economics, University of Michigan 594, Research Seminar in International Economics, University of Michigan.
  11. Devereux, Michael B & Senay, Ozge & Sutherland, Alan, 2013. "Nominal Stability and Financial Globalization," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2013-90, Scottish Institute for Research in Economics (SIRE).
  12. Dubravko Mihaljek & Marc Klau, 2008. "Exchange rate pass-through in emerging market economies: what has changed and why?," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 103-130 Bank for International Settlements.
  13. Charles Engel, 2009. "Currency Misalignments and Optimal Monetary Policy: A Re-examination," RBA Research Discussion Papers, Reserve Bank of Australia rdp2009-01, Reserve Bank of Australia.
  14. Philippe Bacchetta & Kenza Benhima & Yannick Kalantzis, 2011. "Capital Controls with International Reserve Accumulation: Can this Be Optimal ?," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 11.08, Université de Lausanne, Faculté des HEC, DEEP.
  15. Devereux, Michael B., 2004. "Should the exchange rate be a shock absorber?," Journal of International Economics, Elsevier, Elsevier, vol. 62(2), pages 359-377, March.
  16. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, monetary policy, and global financial integration," Working Paper Series, Federal Reserve Bank of San Francisco 2008-15, Federal Reserve Bank of San Francisco.
  17. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements.
  18. Devereux, Michael B & Sutherland, Alan, 2007. "Financial Globalization and Monetary Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6147, C.E.P.R. Discussion Papers.
  19. Wong, Chin-Yoong & Eng, Yoke-Kee & Habibullah, Muzafar Shah, 2014. "Rising China, anxious Asia? A Bayesian New Keynesian view," China Economic Review, Elsevier, Elsevier, vol. 28(C), pages 90-106.
  20. Benigno, Gianluca & Benigno, Pierpaolo, 2006. "Designing targeting rules for international monetary policy cooperation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(3), pages 473-506, April.
  21. Charles Engel, 2014. "Exchange Rate Stabilization and Welfare," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 6(1), pages 155-177, 08.
  22. Garcia, Carlos J. & Restrepo, Jorge E. & Roger, Scott, 2011. "How much should inflation targeters care about the exchange rate?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(7), pages 1590-1617.
  23. Martin Berka & Michael B. Devereux & Charles Engel, 2012. "Real Exchange Rate Adjustment in and out of the Eurozone," American Economic Review, American Economic Association, American Economic Association, vol. 102(3), pages 179-85, May.
  24. Devereux, Michael B. & Yetman, James, 2010. "Price adjustment and exchange rate pass-through," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(1), pages 181-200, February.
  25. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(4), pages 614-639, June.
  26. Charles Engel, 2013. "Inflation and globalisation: a modelling perspective," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and inflation dynamics in Asia and the Pacific, volume 70, pages 99-108 Bank for International Settlements.
  27. Campa, José Manuel & Goldberg, Linda S, 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4391, C.E.P.R. Discussion Papers.
  28. David Cook & Michael B. Devereux, 2013. "Sharing the Burden: Monetary and Fiscal Responses to a World Liquidity Trap," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 190-228, July.
  29. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 263-267, May.
  30. Andrew Filardo & James Yetman, 2012. "The expansion of central bank balance sheets in emerging Asia: what are the risks?," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, June.
  31. Andrew Filardo & Guonan Ma & Dubravko Mihaljek, 2011. "Exchange rate and monetary policy frameworks in EMEs," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 37-63 Bank for International Settlements.
  32. David Cook & James Yetman, 2012. "Expanding central bank balance sheets in emerging Asia: a compendium of risk and some evidence," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 30-75 Bank for International Settlements.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bis:biswps:450. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.