Global Financial Conditions and Monetary Policy Autonomy

39 Pages Posted: 9 Dec 2016

See all articles by Carlos Caceres

Carlos Caceres

International Monetary Fund (IMF)

Yan Carriere-Swallow

International Monetary Fund (IMF)

Bertrand Gruss

International Monetary Fund (IMF)

Date Written: June 2016

Abstract

Is the Mundell-Fleming trilemma alive and well? International co-movement of asset prices takes place along side synchronized business cycles, complicating the identification of financial spillovers and assessments of monetary policy autonomy. A benchmark for interest rate co-movement is to impose the null hypothesis that central banks respond only to the outlook for domestic inflation and output. We show that common approaches used to estimate interest rate spillovers tend to understate the degree of monetary autonomy enjoyed by small open economies with flexible exchange rates. We propose an empirical strategy that partials out those spillovers that are associated with impaired monetary autonomy. Using this approach, we revisit the predictions of the trilemma and find more compelling evidence that flexible exchange rates deliver monetary autonomy than prior work has suggested.

Keywords: Economic conditions, Small open economies, Monetary policy, Central bank autonomy, Central banking and monetary issues, Spillovers, Vector autoregression, Econometric models, Monetary policy; monetary conditions; autonomy; global financial cycle.

JEL Classification: C13, C15, E32, E43, E47, E52, E58, F44

Suggested Citation

Caceres, Carlos and Carriere-Swallow, Yan and Gruss, Bertrand, Global Financial Conditions and Monetary Policy Autonomy (June 2016). IMF Working Paper No. 16/108. Available at SSRN: https://ssrn.com/abstract=2882521

Carlos Caceres (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yan Carriere-Swallow

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Bertrand Gruss

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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