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Exchange Rates and Monetary Spillovers

Author

Listed:
  • Guillaume Plantin

    (Département d'économie)

  • Hyun Song Shin

    (Princeton University)

Abstract

When does the combination of flexible exchange rates and inflation-targeting monetary policy guarantee insulation from global financial conditions? We examine a dynamic global game model of international investment flows where, 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 abrupt reversals where capital outflows go hand-in-hand with currency depreciation, a domestic bond market crash, and inflationary pressure.

Suggested Citation

  • Guillaume Plantin & Hyun Song Shin, 2016. "Exchange Rates and Monetary Spillovers," Sciences Po publications 537, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/2si2ds9f2b9l9qf0lhcuotcfj9
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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. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    3. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    4. Jurek, Jakub W., 2014. "Crash-neutral currency carry trades," Journal of Financial Economics, Elsevier, vol. 113(3), pages 325-347.
    5. 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.
    6. 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)

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    Cited by:

    1. repec:ijc:ijcjou:y:2019:q:3:a:2 is not listed on IDEAS
    2. 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.
    3. Martina Jašová & Richhild Moessner & Elöd Takáts, 2019. "Exchange Rate Pass-Through: What Has Changed Since the Crisis?," International Journal of Central Banking, International Journal of Central Banking, vol. 15(3), pages 27-58, September.
    4. repec:eee:jmacro:v:56:y:2018:i:c:p:172-187 is not listed on IDEAS
    5. Siklos, Pierre L., 2018. "Boom-and-bust cycles in emerging markets: How important is the exchange rate?," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 172-187.
    6. repec:eee:ecmode:v:78:y:2019:i:c:p:180-191 is not listed on IDEAS

    More about this item

    Keywords

    Currency appreciation; Capital flows; Global games;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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