Maurice Obstfeld, Jonathan Ostry, and Mahvash Qureshi
INTERNATIONAL MONETARY FUND
This paper examines the claim that exchange rate regimes are of little salience in the
transmission of global financial conditions to domestic financial and macroeconomic
conditions by focusing on a sample of about 40 emerging market countries over 1986-2013.
Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate
regimes are more likely to experience financial vulnerabilities-faster domestic credit and
house price growth, and increases in bank leverage-than those with relatively flexible
regimes. The transmission of global financial shocks is likewise magnified under fixed
exchange rate regimes relative to more flexible (though not necessarily fully flexible)
regimes. We attribute this to both reduced monetary policy autonomy and a greater
sensitivity of capital flows to changes in global conditions under fixed rate regimes.