Heterogeneous international monetary transmissions: The role of inflation

Jie Li, Xiangyuan Meng, Liqing Zhang and Tianhang Zhou

Journal of International Money and Finance, 2023, vol. 138, issue C

Abstract: In the context of the trilemma hypothesis, we document heterogeneous international monetary transmissions, emphasizing the essential role of inflation. Periphery countries' monetary policy autonomy is subject to their inflation. Facing an interest rate hike of a center country, periphery countries are more willing to follow when their inflation levels are high. Following an interest rate hike helps ease periphery countries' domestic inflation pressure. In contrast, those countries with low inflation are more inclined to follow the center country's interest rate cut. We further confirm that periphery countries' monetary policy autonomy is enhanced by capital controls and flexible exchange regimes, consistent with the trilemma hypothesis.

Keywords: International monetary transmission; Inflation; Trilemma (search for similar items in EconPapers)
JEL-codes: F0 F3 F4 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:138:y:2023:i:c:s0261560623001365

DOI: 10.1016/j.jimonfin.2023.102935

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