International transmissions of monetary shocks: Between a trilemma and a dilemma

Xuehui Han and Shang-Jin Wei

Journal of International Economics, 2018, vol. 110, issue C, 205-219

Abstract: This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. In terms of methodologies, 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 revisions in growth and inflation and the Taylor rule to gauge desired changes in a country's interest rate if it is to focus exclusively on growth, inflation, and real exchange rate stability. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rates are observed. In terms of empirical findings, we differ from the existing literature and document patterns of “2.5-lemma” or something between a trilemma and a dilemma: without capital controls, a flexible exchange rate regime offers some monetary policy autonomy when the center country tightens its monetary policy, yet it fails to do so when the center country lowers its interest rate. Capital controls help to insulate periphery countries from monetary policy shocks from the center country even when the latter lowers its interest rate.

Keywords: Interest rate shocks; Fixed exchange rate; Flexible exchange rate; Dilemma; Trilemma; Capital flow management (search for similar items in EconPapers)
JEL-codes: E42 E43 E52 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (90)

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Working Paper: International Transmissions of Monetary Shocks: Between a Trilemma and a Dilemma (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:110:y:2018:i:c:p:205-219

DOI: 10.1016/j.jinteco.2017.11.005

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