Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

67 Pages Posted: 24 Mar 2020 Last revised: 3 Nov 2020

See all articles by Rashad Ahmed

Rashad Ahmed

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: February 27, 2020

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.

Keywords: International Reserves, Capital Flows, Financial Openness, International Spillovers, Exchange Rates, Trilemma, International Finance, Monetary Policy Shocks

JEL Classification: E4, E52, F30, F31

Suggested Citation

Ahmed, Rashad, Monetary Policy Spillovers under Intermediate Exchange Rate Regimes (February 27, 2020). Available at SSRN: https://ssrn.com/abstract=3545521 or http://dx.doi.org/10.2139/ssrn.3545521

Rashad Ahmed (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

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