The Euro bloc, the Dollar bloc and the Yen bloc: how much monetary policy independence can exchange rate flexibility buy in an interdependent world?

No 154, Working Paper Series from European Central Bank

Abstract: The paper analyses the trade-off between exchange rate flexibility and monetary policy autonomy. It tests empirically the "Possible Duality" hypothesis, i.e. whether countries with more flexible currency regimes are indeed able to exert more monetary policy autonomy than those with less flexible ones, and whether moving towards exchange rate flexibility allows countries to gain monetary independence. The results for a set of open emerging markets and ERM countries show no systematic link between exchange rate flexibility and monetary independence. It is also found that the Fed is still the dominant force in world capital markets, although the importance of EU monetary policy decisions has been increasing and a Euro bloc has formed in Europe. JEL Classification: F41; F31; E50.

Keywords: Exchange rate regime; monetary policy; international transmission; GARCH; error correction mode. (search for similar items in EconPapers)
Date: Written 2002-06
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Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbwps:20020154

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