International Transmissions of Monetary Shocks: Between a Trilemma and a Dilemma

66 Pages Posted: 14 Nov 2016

See all articles by Xuehui Han

Xuehui Han

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: November 2016

Abstract

This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, it combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country’s interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. In terms of empirical findings, we differ from the existing literature and document patterns of “2.5-lemma” or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.

Suggested Citation

Han, Xuehui and Wei, Shang-Jin, International Transmissions of Monetary Shocks: Between a Trilemma and a Dilemma (November 2016). NBER Working Paper No. w22812, Available at SSRN: https://ssrn.com/abstract=2868910

Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

International Monetary Fund (IMF)

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Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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