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Exchange Rate Dynamics and Monetary Spillovers with Imperfect Financial Markets

Author

Listed:
  • Özge Akinci
  • Albert Queralto

Abstract

We develop a quantitative model with imperfections in domestic and international financial markets that generates strong effects of U.S. monetary policy on emerging markets (EMs). Financial imperfections prevent arbitrage both between local EM lending and borrowing rates, and between local-currency and dollar borrowing rates. An adverse feedback effect between financial health and external conditions amplifies the domestic “financial accelerator,” leading to large cross-border spillovers of U.S. monetary policy shocks. The model implies a link between uncovered interest parity violations and local credit spreads, a prediction we show the data strongly supports.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Özge Akinci & Albert Queralto, 2024. "Exchange Rate Dynamics and Monetary Spillovers with Imperfect Financial Markets," The Review of Financial Studies, Society for Financial Studies, vol. 37(2), pages 309-355.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:2:p:309-355.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad078
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    Citations

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    Cited by:

    1. Georgiadis, Georgios & Jarociński, Marek, 2025. "Global spillovers from multi-dimensional US monetary policy," Journal of International Economics, Elsevier, vol. 158(C).
    2. Karau, Sören, 2024. "Relative monetary policy and exchange rates," Discussion Papers 40/2024, Deutsche Bundesbank.
    3. Santiago Camara & Lawrence Christiano & Hüsnü Dalgıc, 2025. "The International Monetary Transmission Mechanism," NBER Macroeconomics Annual, University of Chicago Press, vol. 39(1), pages 65-140.
    4. Boeck, Maximilian & Mori, Lorenzo, 2025. "Has globalization changed the international transmission of U.S. monetary policy?," Journal of International Economics, Elsevier, vol. 157(C).
    5. Giraldo, Carlos & Giraldo, Iader & Gomez-Gonzalez, Jose E. & Uribe, Jorge M., 2024. "Term spread spillovers to Latin America and emergence of the ‘Twin Ds’," International Review of Economics & Finance, Elsevier, vol. 96(PB).
    6. Llosa, Luis Gonzalo & Pérez-Forero, Fernando J. & Tuesta, Vicente, 2025. "Uncertainty shocks and financial conditions in Latin-American countries," Emerging Markets Review, Elsevier, vol. 68(C).
    7. Rogers, John & Sun, Bo & Wu, Wenbin, 2025. "Drivers of the global financial cycle," Journal of International Economics, Elsevier, vol. 156(C).
    8. Juntao Tong, 2026. "Forex-Net: A Hybrid Model for Improved Exchange Rate Prediction Using LSTM and Transfer Learning," Computational Economics, Springer;Society for Computational Economics, vol. 67(2), pages 1413-1427, February.
    9. Liu, Guangling & Mustapher, Marrium, 2025. "Spillover effects of the recent US monetary policy shocks on the South African economy: The role of monetary and fiscal policy coordination," Emerging Markets Review, Elsevier, vol. 69(C).
    10. Roudari, Soheil & Ahmadian- Yazdi, Farzaneh & Mensi, Walid & Tiwari, Aviral, 2024. "Exploring the ripple effect: Time-frequency dynamics of uncertainty indexes, green bonds, oil, and stocks," MPRA Paper 126835, University Library of Munich, Germany.
    11. Garg, Bhavesh & Shah, Sayar Ahmad & Edirisinghe, Janaka, 2025. "Revisiting monetary policy transmission in a new inflation targeting country," Journal of Asian Economics, Elsevier, vol. 100(C).
    12. Janus, Jakub, 2025. "Global financial risk and uncovered interest parity premia in Central and Eastern Europe," Economic Modelling, Elsevier, vol. 148(C).
    13. Liu, Mengyue & Wei, Jiajia & Gao, Wang & Jiang, Yuanyuan & Sun, Yadong, 2025. "Multiscale dynamic linkages of China's financial markets under exchange rate shocks: An MJMD approach," International Review of Financial Analysis, Elsevier, vol. 108(PA).
    14. Masseran, Nurulkamal & Safari, Muhammad Aslam Mohd, 2025. "Multifractal behaviors on exchange rate of world prominent economic countries correspond to Malaysia Ringgit," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 671(C).

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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