US monetary policy and real exchange rate dynamics: the role of exchange rate arrangements and capital controls

Zhenyu Ma, Junbo Wang, Ning Wang and Zehua Xiao

Economics Letters, 2024, vol. 242, issue C

Abstract: This paper examines the impact of US monetary policy on the real exchange rates of other countries in a general equilibrium framework, and explores the effectiveness of exchange rate arrangements and capital control policies. We then construct a panel local projection model to validate the theoretical findings empirically. This paper reveals that the US tight monetary policy first results in the depreciation of real exchange rates in other countries. Second, fixed exchange rate arrangements and tight capital controls can mitigate the spillover effects of US monetary policy. Third, developed countries employ exchange rate arrangements while developing countries utilize capital controls, which can mitigate the impact of US monetary policy shocks more effectively.

Keywords: US monetary policy; Real exchange rate; Exchange rate arrangements; Capital controls (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:242:y:2024:i:c:s0165176524003756

DOI: 10.1016/j.econlet.2024.111891

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