A Tie that Binds: Revisiting the Trilemma in Emerging Market Economies
46 Pages Posted: 9 Aug 2017
Date Written: June 2017
This paper examines the claim that exchange rate regimes are of little salience in thetransmission of global financial conditions to domestic financial and macroeconomicconditions by focusing on a sample of about 40 emerging market countries over 1986-2013.Our findings show that exchange rate regimes do matter. Countries with fixed exchange rateregimes are more likely to experience financial vulnerabilities-faster domestic credit andhouse price growth, and increases in bank leverage-than those with relatively flexibleregimes. The transmission of global financial shocks is likewise magnified under fixedexchange rate regimes relative to more flexible (though not necessarily fully flexible)regimes. We attribute this to both reduced monetary policy autonomy and a greatersensitivity of capital flows to changes in global conditions under fixed rate regimes.
Keywords: Capital flows, Foreign exchange, trilemma, global financial cycle, emerging market economies, Financial Aspects of Economic Integration, Open Economy Macroeconomics
JEL Classification: F31, F36, F41
Suggested Citation: Suggested Citation