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Exchange rates and monetary spillovers

Author

Listed:
  • Plantin, Guillaume

    () (Department of Economics, Sciences Po)

  • Shin, Hyun Song

    () (Bank for International Settlements)

Abstract

When do flexible exchange rates prevent monetary and financial conditions from spilling over across currencies? We examine a model in which international investors strategically supply capital to a small inflation-targeting economy with flexible exchange rates. For some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by reversals where capital outflows go hand-in-hand with currency depreciation, a rise in domestic interest rates, and inflationary pressure. Arbitrarily small shocks to global financial conditions suffice to trigger these dynamics.

Suggested Citation

  • Plantin, Guillaume & Shin, Hyun Song, 0. "Exchange rates and monetary spillovers," Theoretical Economics, Econometric Society.
  • Handle: RePEc:the:publsh:2669
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    References listed on IDEAS

    as
    1. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    2. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    3. Jurek, Jakub W., 2014. "Crash-neutral currency carry trades," Journal of Financial Economics, Elsevier, vol. 113(3), pages 325-347.
    4. Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2016. "Sovereign yields and the risk-taking channel of currency appreciation," BIS Working Papers 538, Bank for International Settlements.
    5. Du, Wenxin & Schreger, Jesse, 2013. "Local Currency Sovereign Risk," International Finance Discussion Papers 1094, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2016. "Sovereign yields and the risk-taking channel of currency appreciation," BIS Working Papers 538, Bank for International Settlements.
    2. Martina Jašová & Richhild Moessner & Előd Takáts, 2016. "Exchange rate pass-through: What has changed since the crisis?," BIS Working Papers 583, Bank for International Settlements.

    More about this item

    Keywords

    Financial crises; global games;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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