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

By Maurice Obstfeld, Jonathan David Ostry, Mahvash S Qureshi

June 8, 2017

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Maurice Obstfeld, Jonathan David Ostry, and Mahvash S Qureshi. A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: 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.

Summary

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.

Subject: Balance of payments, Capital flows, Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Foreign exchange, Housing prices, Prices

Keywords: Capital flows, Conventional peg, Credit growth, Emerging market economies, Exchange rate arrangements, Exchange rate flexibility, Exchange rate regime, Federal funds rate, Financial crisis, Global, Global financial cycle, House price growth, Housing prices, Real GDP, Regime classification, Regime variable, Trilemma, VXO index, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/130
Stock No:

WPIEA2017130
ISBN:

9781484302620
ISSN:

1018-5941

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