Global Financial Conditions and Monetary Policy Autonomy

By Carlos Caceres, Yan Carriere-Swallow, Bertrand Gruss

June 8, 2016

Preview Citation

Format: Chicago

Carlos Caceres, Yan Carriere-Swallow, and Bertrand Gruss. Global Financial Conditions and Monetary Policy Autonomy, (USA: International Monetary Fund, 2016) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Is the Mundell-Fleming trilemma alive and well? International co-movement of asset prices takes place alongside synchronized business cycles, complicating the identification of financial spillovers and assessments of monetary policy autonomy. A benchmark for interest rate comovement is to impose the null hypothesis that central banks respond only to the outlook for domestic inflation and output. We show that common approaches used to estimate interest rate spillovers tend to understate the degree of monetary autonomy enjoyed by small open economies with flexible exchange rates. We propose an empirical strategy that partials out those spillovers that are associated with impaired monetary autonomy. Using this approach, we revisit the predictions of the trilemma and find more compelling evidence that flexible exchange rates deliver monetary autonomy than prior work has suggested.

Subject: Central bank policy rate, Exchange rate arrangements, Exchange rate flexibility, Financial sector policy and analysis, Financial services, Floating exchange rates, Foreign exchange, Spillovers

Keywords: Autonomy, Base-country interest rates, Central bank, Central bank policy rate, Country interest rates, Country monetary policy shock, Domestic policy, Exchange rate, Exchange rate arrangements, Exchange rate flexibility, Floating exchange rates, Global, Global financial cycle, Interest rate decision, Macroeconomic condition, Monetary autonomy, Monetary conditions, Monetary policy, Monetary policy shock, Monetary policy spillover, Reaction function, Spillovers, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/108
Stock No:

WPIEA2016108
ISBN:

9781484382066
ISSN:

1018-5941

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