Exchange Rates and Monetary Spillovers

Guillaume Plantin () and Hyun Song Shin
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Guillaume Plantin: ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Tepper School of Business - CMU - Carnegie Mellon University [Pittsburgh]

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Abstract: When do flexible exchange rates prevent monetary and financial conditions from spilling over across currencies? We examine a model in which international investors strategically supply capital to a small inflation‐targeting economy with flexible exchange rates. For some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by reversals where capital outflows go hand‐in‐hand with currency depreciation, a rise in domestic interest rates, and inflationary pressure. Arbitrarily small shocks to global financial conditions suffice to trigger these dynamics.

Keywords: Currency appreciation; Capital flows; Global games (search for similar items in EconPapers)
Date: 2018-05
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03391932
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Published in Theoretical Economics, 2018, 13 (2), pp.637 - 666. ⟨10.3982/TE2669⟩

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Related works:
Journal Article: Exchange rates and monetary spillovers (2018)
Working Paper: Exchange Rates and Monetary Spillovers (2018)
Working Paper: Exchange rates and monetary spillovers (2016)
Working Paper: Exchange Rates and Monetary Spillovers (2016)
Working Paper: Exchange Rates and Monetary Spillovers (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03391932

DOI: 10.3982/TE2669

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