Monetary spillovers and real exchange rate misalignments in emerging markets

Krittika Banerjee () and Ashima Goyal
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Krittika Banerjee: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: After the adoption of unconventional monetary policies (UMP) in advanced economies (AEs) there weremany studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extentof contribution of EMEs and AEs respectively in real exchange rate (RER) misalignments has not been addressed. Using fixed effects, pooled mean group and common correlated effects we address the gap ina cross-country panel set-up with country specific controls. Multi-way clustering is used to ensure robust statistical inferences. Robust evidence is found for significant monetary spillovers over 1998-2017 in the form of RER overvaluation of EMEs against AEs especially through the portfolio rebalancing channel. EME RER against US saw significantly more overvaluation in UMP years indicating greater role of US in monetary spillovers. However, in the long run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER. Export diversification reduces EME mercantilist motives against US. That AE monetary policy significantly appreciates EMERER should be kept in mind for future policy cooperation between EMEs and AEs.

Keywords: Unconventional monetary policies; monetary spillovers; mercantilist; precautionary; pooled mean group; common correlated effects; cluster robust (search for similar items in EconPapers)
JEL-codes: E4 E5 F3 F42 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2020-09
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (5)

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Journal Article: Monetary spillovers and real exchange rate misalignments in emerging markets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2020-030

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