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International transmissions of monetary shocks: Between a trilemma and a dilemma

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  • Han, Xuehui
  • Wei, Shang-Jin

Abstract

This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, it combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses revisions in growth and inflation and the Taylor rule to gauge desired changes in a country's interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rates are observed. In terms of empirical findings, we differ from the existing literature and document patterns of “2.5-lemma” or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.

Suggested Citation

  • Han, Xuehui & Wei, Shang-Jin, 2018. "International transmissions of monetary shocks: Between a trilemma and a dilemma," Journal of International Economics, Elsevier, vol. 110(C), pages 205-219.
  • Handle: RePEc:eee:inecon:v:110:y:2018:i:c:p:205-219
    DOI: 10.1016/j.jinteco.2017.11.005
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    3. ITO Hiroyuki & Phuong TRAN, 2019. "Managing the Yield Curve in a Financially Globalized World," Discussion papers 19012, Research Institute of Economy, Trade and Industry (RIETI).
    4. Shang-Jin Wei, 2018. "Managing Financial Globalization: Insights from the Recent Literature," Working Papers id:12586, eSocialSciences.
    5. Georgios Georgiadis & Feng Zhu, 2019. "Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates," BIS Working Papers 797, Bank for International Settlements.
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    8. Dąbrowski, Marek A. & Wróblewska, Justyna, 2019. "Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries," MPRA Paper 93813, University Library of Munich, Germany.
    9. Jonathan Kearns & Andreas Schrimpf & Dora Xia, 2018. "Explaining Monetary Spillovers: The Matrix Reloaded," BIS Working Papers 757, Bank for International Settlements.
    10. Jeffrey Frankel, 2019. "Systematic Managed Floating," Open Economies Review, Springer, vol. 30(2), pages 255-295, April.
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    18. Wei, Shang-Jin, 2018. "Managing Financial Globalization: A Guide for Developing Countries Based on the Recent Literature," ADBI Working Papers 804, Asian Development Bank Institute.

    More about this item

    Keywords

    Interest rate shocks; Fixed exchange rate; Flexible exchange rate; Dilemma; Trilemma; Capital flow management;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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