International Transmissions of Monetary Shocks

Shang-Jin Wei and Xuehui Han

No 11070, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. 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 focuses only on growth and inflation goals. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. We find that a flexible exchange rate regime per se does not deliver monetary policy autonomy (in contrast to the conclusions of Obstfeld (2015) and several others). Instead, some form of capital control appears necessary. Interestingly, a combination of capital controls and a flexible exchange rate may provide the most buffer for developing countries against foreign monetary policy shocks.

Keywords: Trilemma; Monetary policy independence; Capital control; Exchange rate regime; Taylor rule (search for similar items in EconPapers)
JEL-codes: E42 E43 E52 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (11)

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