Financial Spillovers to Emerging Economies: the Role of Exchange Rates and Domestic Fundamentals

33 Pages Posted: 25 Aug 2020

Date Written: July 28, 2020

Abstract

Financial integration of emerging economies is on the rise and so are financial and monetary spillovers, especially those originating from US economic policy decisions and the (related) evolution of the US dollar. We revisit the “trilemma” vs. “dilemma” hypothesis and assess whether, and to what extent, exchange rate regimes and other relevant country fundamentals affect the sensitivity of domestic financial conditions to global risk aversion and US financial conditions. Results for a sample of 17 emerging economies over the period 1990-2018 suggest that the trilemma hypothesis appears to be still valid, as more flexible exchange rate regimes help in mitigating spillovers to stock market returns, sovereign spreads and real credit growth. However, other country fundamentals such as the current account, trade integration and US dollar debt exposure are also important factors.

Keywords: trilemma, global financial cycle, financial conditions, emerging market economies, international policy transmission, spillovers

JEL Classification: E42, E44, E52, F31, F36, F41, G15

Suggested Citation

Ciarlone, Alessio and Marconi, Daniela, Financial Spillovers to Emerging Economies: the Role of Exchange Rates and Domestic Fundamentals (July 28, 2020). Bank of Italy Occasional Paper No. 571, Available at SSRN: https://ssrn.com/abstract=3680737 or http://dx.doi.org/10.2139/ssrn.3680737

Alessio Ciarlone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Daniela Marconi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
17
Abstract Views
142
PlumX Metrics