U.S. Monetary Policy and International Risk Spillovers

Abstract

provided valuable comments on the final draft. I am grateful to Helene Rey for her insightful discussion. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The Dollar and Emerging Market Economies: Financial Vulnerabilities Meet the International Trade System

“…Fixing or managing exchange rates have other negative effects, such as the loss of monetary autonomy and a higher risk of a balance of payment crisis due to volatile capital flows. In fact, Kalemli-Ozcan (2019) shows that free-floating EMEs are much more insulated from international risk spillovers than EMEs with managed floats. Thus, although I find fewer benefits from flexible exchange rates, these results do not change the fact that EMEs are still better off with flexible rather than fixed or managed exchange rates.…”

Monetary policy spillovers under intermediate exchange rate regimes

“…This could be due to the presence of important factors which are correlated with country i's interest rate. For example, monetary pass-through estimates may be low in emerging markets because risk premia tend to be highly volatile (Kalemli-Ozcan [2019]). Fear of Floating and Global Financial Cycles, operating through the real exchange rate and financial conditions respectively, may also impact country i's policy choices (Calvo and Reinhart [2002] and Rey [2015]).…”

Global Flight-to-Safety Shocks

“…On the transmission and policy implications of global shocks, the association between wider sovereign spreads and subsequently deeper economic contractions induced by global flight-to-safety shocks is consistent the pass-through of global financial shocks depending on the sensitivity of domestic financial factors (Akinci [2013], , Kalemli-Ozcan [2019]). That currency depreciation is associated with subsequently deeper contractions points to a financial channel of exchange rates associated with currency mismatch (Eichengreen andHausmann [1999] Hofmann et al [2019], Carstens and Shin [2019], Miranda-Agrippino and Rey [2020]), contrasting conventional wisdom related to the buffering effects of a flexible exchange rate as argued in Obstfeld et al [2019], and rather, supportive of stabilization policies among financially developing countries Aghion et al [2009].…”

“…This paper contributes to the active literature investigating the global macroeconomic implications of financial shocks and global financial cycles (Uribe and Yue [2006], Akinci [2013], Rey [2015], , , Obstfeld et al [2019], Kalemli-Ozcan [2019], Cesa-Bianchi et al [2019], Miranda-Agrippino and Rey [2020]). This issue has received renewed attention in light of deep global financial integration occurring over the past two decades, and the concerns raised over global financial stability.…”