Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

I investigate monetary policy transmission under the Trilemma across Advanced and Emerging Market Economies, paying particular attention on the extent of spillovers under intermediate exchange rate regimes (i.e. managed floats). The extent of monetary pass-through: 1) is broadly significant, but more incomplete in Emerging Markets than Advanced Economies, 2) occurs over both the short-run and longer-run, 3) varies within intermediate exchange rate regimes, 4) appears to be diversifiable under a basket peg, and 5) is non-linear in exchange rate flexibility. The latter three points suggest that near-corner exchange rate policies can carry starkly different implications from corner policies themselves: Countries can face almost the same monetary autonomy as under a float without resorting to a pure float. Countries under a fixed regime appear to gain disproportionate monetary independence by giving up relatively little exchange rate stability. The use of international reserves as an additional policy instrument appears to play a role in explaining these non-linearities, particularly in Emerging Markets. Such gains in monetary autonomy are allocated towards domestic objectives differently across Advanced Economies and Emerging Markets. Advanced Economies tend to put greater emphasis on output stabilization while Emerging Markets focus on inflation. Non-linear policy trade-offs under intermediate exchange rate regimes may help explain the continuous rejection of the Two Corners hypothesis, the scarcity of true pure floats, and the persistent dominance of middle-ground exchange rate policy.