Monetary Policy Spillovers and the Trilemma in the New Normal: Periphery Country Sensitivity to Core Country Conditions

By Joshua Aizenman, M. Chinn, Hiro Ito. 2016

257 citations recorded by the source corpus.

We investigate why and how the financial conditions of developing and emerging market countries (peripheral countries) can be affected by the movements in the center economies – the U.S., Japan, the Eurozone, and China. We apply a two-step approach. First, we estimate the sensitivity of countries' financial variables to the center economies [policy interest rate, stock market prices, and the real effective exchange rates (REER)] while controlling for global and domestic factors. Next, we examine the association of the estimated sensitivity coefficients with the macroeconomic conditions, policies, real and financial linkages with the center economies, and the level of institutional development. In the last two decades, for most financial variables, the strength of the links with the center economies have been the dominant factor while the movements of policy interest rate also appear sensitive to global financial shocks around the emerging market crises of the late 1990s and since the global financial crisis of 2008. While certain macroeconomic and institutional variables are important, the arrangement of open macropolicies such as the exchange rate regime and financial openness are also found to have direct influence on the sensitivity to the center economies. An economy that pursues greater exchange rate stability and financial openness faces a stronger link with the center economies through policy interest rates and real effective exchange rate (REER) movements. We also find that exchange market pressure (EMP) in peripheral economies is sensitive to the movements of the center economies' REER and EMP during and after the global financial crisis. Open macro policy arrangements, especially exchange rate regimes, also have indirect effects on the strength of financial linkages, interacting with other macroeconomic conditions. Thus, trilemma policy arrangements, including exchange rate flexibility, continue to affect the sensitivity of developing countries to policy changes and shocks in the center economies.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/a46eda0e3b6cdb71817887c30315a1da1e13b60b

Citations in the corpus

• U.S. Monetary Policy and International Risk Spillovers (2019, unknown): “…that at the business cycle quarterly frequency there is not much insulation from better fundamentals, as witnessed during the “taper tantrum” episode (Aizenman et al. (2015), Eichengreen and Gupta (2017)).17 Policymakers frequently argue that capital flows can be very fickle, especially in times…”
• Global spillover effects of US uncertainty (2017, unknown): “The vertical lines mark the nancial crisis and the three major events of the Euro debt crisis: [1] September 2008 through December 2008 when Lehman Brothers collapsed and subsequently the nancial markets were disturbed, [2] May 2010 when the Eurozone members and the IMF agreed on a large bailout pac”
• Federal Reserve Policy in an International Context (2017, unknown): “…of countries to policy actions at the “center,” a conclusion confirmed by a large and growing literature (Fratzscher, 2012; Ahmed and Zlate, 2014; Bowman, Londono, and Sapriza, 2014; Mishra and others, 2014; Ahmed, Coulibaly, and Zlate, 2015; Aizenman, Chinn, and Ito, 2015; Georgiadis, 2015).”
• A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies (2017, unknown): “(2005); Miniane and Rogers (2007); Bluedorn and Bowdler (2010); Klein and Shambaugh (2015); Goldberg (2013); Obstfeld (2014); Aizenman et al. (2015); Georgiadis and Mehl (2015); Ricci and Shi (2016); Caceres et al. (2016); and Bekaert and Mehl (2017).”