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

Maurice Obstfeld, Jonathan Ostry () and Mahvash Qureshi

No 17/130, IMF Working Papers from International Monetary Fund

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: Exchange rate regimes; Fixed exchange rates; Flexible exchange rates; Monetary policy; Capital flows; Emerging markets; trilemma, global financial cycle, emerging market economies, Financial Aspects of Economic Integration, Open Economy Macroeconomics (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mac, nep-mon and nep-opm
Date: 2017-06-08
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Journal Article: A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies (2019) Downloads
Working Paper: A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies (2017) Downloads
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