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Global Financial Conditions and Monetary Policy Autonomy
Author:
Carlos Caceres
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Mr. Yan Carriere-Swallow
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Bertrand Grussnull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 108
Language:
English
Publication Date:
08 Jun 2016
DOI:
https://doi.org/10.5089/9781484382066.001
ISBN:
9781484382066
ISSN:
1018-5941
Pages:
38
Keywords:
WP; exchange rate; central bank; Monetary policy; monetary conditions; autonomy; global financial cycle; monetary autonomy; country interest rates; monetary policy spillover; country monetary policy shock; reaction function; macroeconomic condition; interest rate decision; monetary policy shock; domestic policy; base-country interest rates; Spillovers; Central bank policy rate; Floating exchange rates; Exchange rate flexibility; Exchange rate arrangements; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2016: Issue 108