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A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies
Author:
Mr. Maurice Obstfeld
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Mr. Jonathan David Ostry
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Miss Mahvash S Qureshi
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Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 130
Language:
English
Publication Date:
08 Jun 2017
DOI:
https://doi.org/10.5089/9781484302620.001
ISBN:
9781484302620
ISSN:
1018-5941
Pages:
45
Keywords:
WP; exchange rate regime; real GDP; financial crisis; VXO index; regime classification; trilemma; global financial cycle; capital flows; emerging market economies; credit growth; federal funds rate; house price growth; regime variable; Exchange rate arrangements; Conventional peg; Exchange rate flexibility; Housing prices; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund