Monetary Policy Divergence, Net Capital Flows, and Exchange Rates: Accounting for Endogenous Policy Responses
Jonathan Davis () and
Andrei Zlate ()
No 328, Globalization Institute Working Papers from Federal Reserve Bank of Dallas
This paper measures the effect of monetary tightening in key advanced economies on net capital flows and exchange rates around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous responses of domestic monetary policy depends on each economy’s capital account openness and exchange rate regime. We develop a method to plot counter-factual impulse responses for net capital outflows under the assumption that domestic interest rates are held constant despite foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as ¼ for floaters and ½ for peggers with open capital accounts.
JEL-codes: E5 F3 F4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
https://www.dallasfed.org/~/media/documents/institute/wpapers/2017/0328.pdf Full text (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:328
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Globalization Institute Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().