Working Paper: NBER ID: w22812
Authors: Xuehui Han; Shangjin Wei
Abstract: This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, it combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country’s interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. In terms of empirical findings, we differ from the existing literature and document patterns of “2.5-lemma” or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.
Keywords: monetary policy; capital controls; exchange rates; emerging markets
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy tightening (E52) | peripheral countries' monetary policy autonomy (F36) |
| US monetary policy lowering (E52) | peripheral countries' interest rates (E43) |
| capital controls (F38) | insulation from foreign monetary shocks (F31) |
| exchange rate regimes and capital controls (F33) | monetary policy transmission (F42) |
| capital controls (F38) | monetary policy autonomy (E58) |