Working Paper: CEPR ID: DP12093
Authors: Maurice Obstfeld; Jonathan D. Ostry; Mahvash S. Qureshi
Abstract: This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions 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 rate regimes are more likely to experience financial vulnerabilities—faster domestic credit and house price growth, and increases in bank leverage—than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.
Keywords: trilemma; global financial cycle; capital flows; emerging market economies
JEL Codes: F31; F36; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VXO index (C58) | domestic credit growth (E51) |
| VXO index (C58) | real house price growth (R31) |
| exchange rate regimes (F33) | domestic credit growth (E51) |
| exchange rate regimes (F33) | real house price growth (R31) |
| exchange rate regimes (F33) | banking system leverage (G21) |
| greater sensitivity of domestic financial conditions (E44) | reduced monetary policy autonomy (E58) |
| greater sensitivity of capital flows (F32) | global conditions (F01) |