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Monetary Policy Effectiveness, Net Foreign Currency Exposure and Financial Globalisation

Author

Listed:
  • Josip Tica

    (Faculty of Economics and Business, University of Zagreb)

  • Tomislav Globan

    (Faculty of Economics and Business, University of Zagreb)

  • Vladimir Arčabić

    (Faculty of Economics and Business, University of Zagreb)

Abstract

In this paper we use an innovative methodological approach to investigate how the classic Mundell-Flemming trilemma monetary policy mix is affected by global financial integration ("dilemma" hypothesis), accumulation of international reserves ("quadrilemma" hypothesis) and foreign exchange rate exposure of developing, emerging and transition countries. In order to compare competing policy mix hypotheses within the single methodological framework we use two threshold variables simultaneously in a dynamic panel threshold model. Thresholds values are endogenously estimated using a grid search. Exchange rate stability index is used as a primary threshold variable and international reserves, financial openness and foreign currency exposure are rotated as secondary threshold variables. Results imply that there are significant differences between fixed and flexible exchange rate regimes even at the high levels of financial integration and that transmission of international business cycle might be a consequence of an exchange rate regime choice (due to foreign currency exposure) of developing and emerging countries and not a consequence of inability to implement counter-cyclical monetary policy.

Suggested Citation

  • Josip Tica & Tomislav Globan & Vladimir Arčabić, 2016. "Monetary Policy Effectiveness, Net Foreign Currency Exposure and Financial Globalisation," EFZG Working Papers Series 1603, Faculty of Economics and Business, University of Zagreb.
    • Handle: RePEc:zag:wpaper:1603
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Mundell-Fleming; Dillemma vs. trilemma; Foreign currency exposure; Qaudrilemma; Panel threshold model;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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