The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Carlos Caceres, Yan Carriere-Swallow, and Bertrand Gruss
INTERNATIONAL MONETARY FUND
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.