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A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies

Maurice Obstfeld, Jonathan Ostry () and Mahvash Qureshi

No 12093, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on a sample of about 40 emerging market countries over 1986-2013. Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities - faster domestic credit and house price growth, and increases in bank leverage - than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.

Keywords: Capital Flows; emerging market economies; global financial cycle; trilemma (search for similar items in EconPapers)
JEL-codes: F31 F36 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
Date: 2017-06
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