Monetary Policy Effectiveness, Net Foreign Currency Exposure and Financial Globalisation

Josip Tica, Tomislav Globan and Vladimir Arčabić

No 1603, EFZG Working Papers Series from Faculty of Economics and Business, University of Zagreb

Abstract: In this paper we use an innovative methodological approach to investigate how the classic Mundell-Flemming trilemma monetary policy mix is affected by global financial integration ("dilemma" hypothesis), accumulation of international reserves ("quadrilemma" hypothesis) and foreign exchange rate exposure of developing, emerging and transition countries. In order to compare competing policy mix hypotheses within the single methodological framework we use two threshold variables simultaneously in a dynamic panel threshold model. Thresholds values are endogenously estimated using a grid search. Exchange rate stability index is used as a primary threshold variable and international reserves, financial openness and foreign currency exposure are rotated as secondary threshold variables. Results imply that there are significant differences between fixed and flexible exchange rate regimes even at the high levels of financial integration and that transmission of international business cycle might be a consequence of an exchange rate regime choice (due to foreign currency exposure) of developing and emerging countries and not a consequence of inability to implement counter-cyclical monetary policy.

Keywords: Mundell-Fleming; Dillemma vs. trilemma; Foreign currency exposure; Qaudrilemma; Panel threshold model (search for similar items in EconPapers)
JEL-codes: E42 F15 F31 F41 (search for similar items in EconPapers)
Pages: 23
Date: 2016-07-01
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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http://web.efzg.hr/repec/pdf/Clanak%2016-03.pdf First version, 2016 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:zag:wpaper:1603

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