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Monetary spillovers and real exchange rate misalignments in emerging markets

Author

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  • Krittika Banerjee

    (Indira Gandhi Institute of Development Research)

  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

Abstract

After the adoption of unconventional monetary policies (UMP) in advanced economies (AEs) there weremany studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extentof contribution of EMEs and AEs respectively in real exchange rate (RER) misalignments has not been addressed. Using fixed effects, pooled mean group and common correlated effects we address the gap ina cross-country panel set-up with country specific controls. Multi-way clustering is used to ensure robust statistical inferences. Robust evidence is found for significant monetary spillovers over 1998-2017 in the form of RER overvaluation of EMEs against AEs especially through the portfolio rebalancing channel. EME RER against US saw significantly more overvaluation in UMP years indicating greater role of US in monetary spillovers. However, in the long run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER. Export diversification reduces EME mercantilist motives against US. That AE monetary policy significantly appreciates EMERER should be kept in mind for future policy cooperation between EMEs and AEs.

Suggested Citation

  • Krittika Banerjee & Ashima Goyal, 2020. "Monetary spillovers and real exchange rate misalignments in emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2020-030, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2020-030
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    Cited by:

    1. Michael Takudzwa Pasara & Vincent Mugwira, 2023. "Exchange Rate (MIS-) Alignment: An Application of the Behavioural Equilibrium Exchange Rate (beer) Approach to Zimbabwe (1990-2018)," International Journal of Economics and Financial Issues, Econjournals, vol. 13(5), pages 128-141, September.
    2. Banerjee, Krittika & Goyal, Ashima, 2021. "Behavioural​ equilibrium real exchange rates and misalignments: Evidence from large emerging markets," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 414-436.
    3. Ashima Goyal & Rupayan Pal, 2022. "Global shocks and international policy coordination," Global Policy, London School of Economics and Political Science, vol. 13(4), pages 458-468, September.
    4. Krittika Banerjee & Ashima Goyal, 2021. "Current account imbalances: Exploring role of domestic and external factors for large emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-001, Indira Gandhi Institute of Development Research, Mumbai, India.

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    More about this item

    Keywords

    Unconventional monetary policies; monetary spillovers; mercantilist; precautionary; pooled mean group; common correlated effects; cluster robust;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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