Abstract In this paper we ask whether countries can influence their exposure to changes in global financial conditions. Specifically, we show that even though we can model cross-country capital flows via a global factor that closely tracks changes in global financial conditions, there is a large degree of heterogeneity in the sensitivity of each country to this same global factor. We then evaluate whether this cross-country heterogeneity can be attributed to different policy choices, including measures of capital flow management, such as capital controls and macroprudential policies. In our main results, we show that higher levels of capital controls and macroprudential policies both dampen the sensitivity to the global factor. Furthermore, we show that countries’ monetary and exchange rate policies can also be successfully deployed. Overall, our results have implications that extend beyond the surge that preceded the 2008 global financial crisis, and that closely resonate in light of the financial disruptions that followed the COVID-19 pandemic.
Monetary independence is at the core of the macroeconomic policy trilemma stating that an independent monetary policy, a fixed exchange rate and free movement of capital cannot exist at the same time. This study examines the relationship between monetary autonomy and inflation dynamics in a panel of Caribbean countries over the period 1980–2017. The empirical results show that monetary independence is a significant factor in determining inflation, even after controlling for macroeconomic developments. In other words, greater monetary policy independence, measured as a country’s ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship—robust to alternative specifications and estimation methodologies—has clear policy implications, especially for countries that maintain pegged exchange rates relative to the U.S. dollar with a critical bearing on monetary autonomy.
Mr. Luis M. Cubeddu, Signe Krogstrup, Gustavo Adler, Mr. Pau Rabanal, Mai Chi Dao, Mrs. Swarnali A Hannan, Luciana Juvenal, Ms. Carolina Osorio Buitron, Cyril Rebillard, Mr. Daniel Garcia-Macia, Callum Jones, Jair Rodriguez, Kyun Suk Chang, Deepali Gautam, Zijiao Wang, and Ms. Nan Li
The assessment of external positions and exchange rates is a key mandate of the IMF. This paper
presents the updated External Balance Assessment (EBA) framework—a key input in the conduct of
multilaterally-consistent external sector assessments of 49 advanced and emerging market
economies—following the two rounds of refinements adopted since the framework was introduced in
2012 (as described in Phillips et al., 2013). It also presents new complementary tools for shedding light
on the role of structural factors in explaining external imbalances and assessing potential biases in the
measurement of external positions. Remaining challenges and areas of future work are also discussed.
Mr. Adrian Alter, Jane Dokko, and Miss Dulani Seneviratne
We examine the relationship between house price synchronicity and global financial
conditions across 40 countries and about 70 cities over the past three decades. The role
played by cross-border banking flows in residential property markets is examined as well.
Looser global financial conditions are associated with greater house price synchronicity,
even after controlling for bilateral financial integration. Moreover, we find that
synchronicity across major cities may differ from that of their respective countries’,
perhaps due to the influence of global investors on local house price dynamics. Policy
choices such as macroprudential tools and exchange rate flexibility appear to be relevant
for mitigating the sensitivity of domestic housing markets to the rest of the world.
We provide a theory of the limits to monetary policy independence in open economies
arising from the interaction between capital flows and domestic collateral constraints. The
key feature of our theory is the existence of an “Expansionary Lower Bound” (ELB),
defined as an interest rate threshold below which monetary easing becomes
contractionary. The ELB can be positive, thus acting as a more stringent constraint than
the Zero Lower Bound. Furthermore, the ELB is affected by global monetary and
financial conditions, leading to novel international spillovers and crucial departures from
Mundell’s trilemma. We present two models under which the ELB may arise, the first
featuring carry-trade capital flows and the second highlighting the role of currency
This paper estimates the exchange rate pass-through to consumer price inflation in Angola
and Nigeria, with particular emphasis on the changes of the pass-through over time. Even
though the two countries share smilar dependence on oil exports, this paper reveals different
results. For Angola, the long-run exchange rate pass-through to prices is high, though it has
weakened in recent years reflecting the de-dollarization of the economy. In Nigeria, there is
no stable long-run relationship between the exchange rate and prices, and changes in the
exchange rate do not have a significant pass-through effect on inflation. However, the passthrough
effect on core inflation is significant.