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International Transmissions of Monetary Shocks

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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. 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 surprises in growth and inflation and the Taylor rule to gauge desired changes in a country’s interest rate if it focuses only on growth and inflation goals. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. We find that a flexible exchange rate regime per se does not deliver monetary policy autonomy (in contrast to the conclusions of Obstfeld (2015) and several others). Instead, some form of capital control appears necessary. Interestingly, a combination of capital controls and a flexible exchange rate may provide the most buffer for developing countries against foreign monetary policy shocks.

Suggested Citation

  • Han, Xuehui & Wei, Shang-Jin, 2016. "International Transmissions of Monetary Shocks," CEPR Discussion Papers 11070, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11070
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    References listed on IDEAS

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    Cited by:

    1. Eugenio Cerutti & Stijn Claessens & Andrew K. Rose, 2019. "How Important is the Global Financial Cycle? Evidence from Capital Flows," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(1), pages 24-60, March.
    2. 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).
    3. Ligonniere, Samuel, 2018. "Trilemma, dilemma and global players," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 20-39.
    4. Fulgence Dominick Waryoba, 2018. "Yuan Revaluation and China’s External Trade Performance," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 4(2), pages 112-119, June.
    5. Jonathan Kearns & Andreas Schrimpf & Dora Xia, 2018. "Explaining Monetary Spillovers: The Matrix Reloaded," BIS Working Papers 757, Bank for International Settlements.
    6. Stephanie Guichard, 2017. "10 Years after the Global Financial Crisis: What Have We Learnt About International Capital Flows?," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 1-30, October.
    7. Douglas W. Diamond & Yunzhi Hu & Raghuram G. Rajan, 2020. "The Spillovers from Easy Liquidity and the Implications for Multilateralism," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(1), pages 4-34, March.

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    More about this item

    Keywords

    capital control; exchange rate regime; monetary policy independence; Taylor Rule; trilemma;
    All these keywords.

    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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