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Title: International Transmissions of Monetary Shocks

Author(s): Xuehui Han and Shang-Jin Wei

Publication Date: January 2016

Keyword(s): capital control, exchange rate regime, monetary policy independence, Taylor Rule and trilemma

Programme Area(s): International Macroeconomics and Finance

Abstract: This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. It combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country?s interest rate if it focuses only on growth and inflation goals. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. We find that a flexible exchange rate regime per se does not deliver monetary policy autonomy (in contrast to the conclusions of Obstfeld (2015) and several others). Instead, some form of capital control appears necessary. Interestingly, a combination of capital controls and a flexible exchange rate may provide the most buffer for developing countries against foreign monetary policy shocks.

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Bibliographic Reference

Han, X and Wei, S. 2016. 'International Transmissions of Monetary Shocks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11070