Mundell’s trilemma: Policy trade-offs within the middle ground

Herwartz, Helmut; Roestel, Jan

doi:10.1016/j.jimonfin.2017.04.002

Cited by 10 publications

(12 citation statements)

References 35 publications

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“…A growing body of evidence suggests that the Trilemma generally holds in the short and long-run: Conditional on open capital flows, international transmission of monetary policy from base countries tends to be stronger under fixed exchange rates than under floating (Shambaugh, 2004[57], Obstfeld et al, 2005[54], Miniane and Rogers, 2007[49], Klein and Shambaugh, 2015 [45], Herwartz and Roestel, 2017 [36], Eichengreen, 2018 [16], Han and Wei, 2018 [34] ) 2 . Typical estimates of monetary pass-through suggest that transmission is incomplete (i.e.…”

Section: The International Policy Trilemmamentioning

confidence: 99%

“…The closest study related to this paper is Herwartz and Roestel (2017) [36], where the authors study monetary spillovers in a sample of Advanced Economies, using the standard deviation of exchange rate changes as a continuous proxy for exchange rate regime. I build on previous works by considering a much larger panel of countries across both Advanced Economies and Emerging Markets, while also introducing a continuous, de facto measure of exchange rate regime which draws on the literature related to estimating currency zones 1 .…”

Section: Introductionmentioning

confidence: 99%

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Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

Ahmed

2020

SSRN Journal

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I investigate monetary policy transmission under the Trilemma across Advanced and Emerging Market Economies, paying particular attention on the extent of spillovers under intermediate exchange rate regimes (i.e. managed floats). The extent of monetary pass-through: 1) is broadly significant, but more incomplete in Emerging Markets than Advanced Economies, 2) occurs over both the short-run and longer-run, 3) varies within intermediate exchange rate regimes, 4) appears to be diversifiable under a basket peg, and 5) is non-linear in exchange rate flexibility. The latter three points suggest that near-corner exchange rate policies can carry starkly different implications from corner policies themselves: Countries can face almost the same monetary autonomy as under a float without resorting to a pure float. Countries under a fixed regime appear to gain disproportionate monetary independence by giving up relatively little exchange rate stability. The use of international reserves as an additional policy instrument appears to play a role in explaining these non-linearities, particularly in Emerging Markets. Such gains in monetary autonomy are allocated towards domestic objectives differently across Advanced Economies and Emerging Markets. Advanced Economies tend to put greater emphasis on output stabilization while Emerging Markets focus on inflation. Non-linear policy trade-offs under intermediate exchange rate regimes may help explain the continuous rejection of the Two Corners hypothesis, the scarcity of true pure floats, and the persistent dominance of middle-ground exchange rate policy.

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Section: The International Policy Trilemmamentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

Ahmed

2020

SSRN Journal

View full text Add to dashboard Cite

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“…A growing body of evidence suggests that the Trilemma generally holds in the short and long-run: conditional on open capital flows, international transmission of monetary policy from base countries tend to be stronger under fixed exchange rates than under floating (Frankel et al [2004], Shambaugh [2004], Obstfeld et al [2005], Miniane and Rogers [2007], Klein and Shambaugh [2015], Herwartz and Roestel [2017], Eichengreen [2018], Han and Wei [2018]). 1 Typical estimates of monetary pass-through suggest that transmission is incomplete (i.e.…”

Section: Introductionmentioning

confidence: 99%

“…Studies combining the two approaches -testing monetary policy spillovers under continuous measures of exchange rate flexibility -are few and far apart. One closely related paper, Herwartz and Roestel [2017], studies monetary pass-through in such a fashion among a sample of advanced economies, documenting a nearly linear trade-off between exchange rate stability and monetary autonomy. I build on this issue, differing from the previous study in several ways.…”

Section: Introductionmentioning

confidence: 99%

“…The method is flexible enough to allow for multiple exchange rate targets, allowing for spillover tests under basket peg policies. By contrast, Herwartz and Roestel [2017] rely on the exchange stability index proposed in Aizenman et al [2008], which is a transformation of the annual standard deviation of monthly exchange rate changes. By using higher-frequency, daily exchange rate data my approach provides more consistent estimates of quarterly de facto exchange rate variability.…”

Section: Introductionmentioning

confidence: 99%

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Monetary policy spillovers under intermediate exchange rate regimes

Ahmed

2021

Journal of International Money and Finance

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Exchange Rate Policy and Capital Flow Management

Juhro

Siregar

Trisnanto

2022

Central Bank Policy Mix: Issues, Challenges, and Policy Responses

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This chapter discusses the relationship between exchange rate and foreign capital flow management, as influenced by the increasingly integrated nature of the global economy and finance. From the central bank's perspective, a strategy mix composed of interest rate and exchange rate stabilization policy alongside capital flow management has the potential to provide better results for monetary and financial system stability. Interest rate policy still needs to be directed towards achieving price stability, while exchange rate stabilization policy and capital flow management are aimed at maintaining external and internal stability. This chapter also sheds light on the closeness of the relationship between monetary stability and financial system stability. The magnitude of changes in foreign capital flows not only threatens macroeconomic stability, but also creates pressures on financial system stability, such as liquidity and bank credit growth. In light of this, the integration of monetary policy and macroprudential policy is increasingly important.

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Mundell’s trilemma: Policy trade-offs within the middle ground

Cited by 10 publications

References 35 publications

Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

Monetary Policy Spillovers under Intermediate Exchange Rate Regimes

Monetary policy spillovers under intermediate exchange rate regimes

Exchange Rate Policy and Capital Flow Management

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