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A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies

Author

Listed:
  • Mr. Maurice Obstfeld
  • Mr. Jonathan David Ostry
  • Mahvash S Qureshi

Abstract

This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on a sample of about 40 emerging market countries over 1986–2013. Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities—faster domestic credit and house price growth, and increases in bank leverage—than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.

Suggested Citation

  • Mr. Maurice Obstfeld & Mr. Jonathan David Ostry & Mahvash S Qureshi, 2017. "A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies," IMF Working Papers 2017/130, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/130
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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