A Tie that Binds: Revisiting the Trilemma in Emerging Market Economies

46 Pages Posted: 9 Aug 2017

See all articles by Maurice Obstfeld

Maurice Obstfeld

International Monetary Fund (IMF)

Jonathan D. Ostry

International Monetary Fund (IMF)

Mahvash Saeed Qureshi

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 2017

Abstract

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

Obstfeld, Maurice and Ostry, Jonathan D. and Qureshi, Mahvash Saeed, A Tie that Binds: Revisiting the Trilemma in Emerging Market Economies (June 2017). IMF Working Paper No. 17/130. Available at SSRN: https://ssrn.com/abstract=3014041

Maurice Obstfeld (Contact Author)

International Monetary Fund (IMF) ( email )

Jonathan D. Ostry

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Mahvash Saeed Qureshi

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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