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

IMF Working Papers, June 8, 2017

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

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Bibliographic details

• Authors: Maurice Obstfeld, Jonathan David Ostry, Mahvash S Qureshi
• Published: June 8, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484302620.001

Authors and publication

• Authors: Maurice Obstfeld, Jonathan David Ostry, Mahvash S Qureshi
• Date: June 8, 2017
• Series: IMF Working Papers, Working Paper No. 2017/130
• Volume: 2017; Issue: 130; Pages: 45
• DOI: https://doi.org/10.5089/9781484302620.001
• ISBN: 9781484302620; ISSN: 1018-5941

Research question and sample

• Research question: Whether exchange rate regimes are salient in the transmission of global financial conditions to domestic financial and macroeconomic conditions.
• Sample: about 40 emerging market countries over 1986–2013.

Key findings

• Exchange rate regimes do matter:
  • Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities than those with relatively flexible regimes.
  • Specific vulnerabilities under fixed exchange rate regimes include:
  • Faster domestic credit growth.
  • Faster house price growth.
  • Increases in bank leverage.
• Transmission of global financial shocks:
  • Transmission is magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes.
• Attributed mechanisms:
  • Reduced monetary policy autonomy under fixed rate regimes.
  • Greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.

Subjects and keywords

• 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

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• A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies, WP/17/130, June 2017
  • A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies, WP/17/130, June 2017 (Markdown version)
  • A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies, WP/17/130, June 2017 (PDF)