Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

Ahmed, Rashad (2020): Monetary Policy Spillovers under Intermediate Exchange Rate Regimes.

Abstract

Testing the international Trilemma traditionally relies on discretely classified exchange rate regimes. This simplification limits the implications drawn for middle-ground policies like managed floats or basket pegs, and inhibits inference on the empirical shape of the exchange rate stability -- monetary autonomy trade-off. To address these issues, this paper proposes a continuous measure of exchange rate flexibility for estimating monetary policy spillovers along the entire spectrum of peg intensities. Monetary spillovers generally increases with exchange rate stability, even within middle ground policies, and basket pegs diversify such spillovers. Using machine learning techniques, I then test for non-linearities, and show that the relationship between monetary autonomy and exchange rate stability is significantly non-linear: partially targeting the exchange rate translates to disproportionately smaller or larger monetary spillovers along middle-ground exchange rate regimes. For emerging markets in particular, active reserves management is a key mechanism associated with relaxing the Trilemma.

• Item Type: MPRA Paper
• Language: English
• Keywords: International Reserves, Capital Flows, Financial Openness, International Spillovers, Exchange Rates, Trilemma, International Finance, Monetary Policy Shocks
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F3 - International Finance > F30 - General; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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