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US monetary policy and real exchange rate dynamics: the role of exchange rate arrangements and capital controls

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  • Ma, Zhenyu
  • Wang, Junbo
  • Wang, Ning
  • Xiao, Zehua

Abstract

This paper examines the impact of US monetary policy on the real exchange rates of other countries in a general equilibrium framework, and explores the effectiveness of exchange rate arrangements and capital control policies. We then construct a panel local projection model to validate the theoretical findings empirically. This paper reveals that the US tight monetary policy first results in the depreciation of real exchange rates in other countries. Second, fixed exchange rate arrangements and tight capital controls can mitigate the spillover effects of US monetary policy. Third, developed countries employ exchange rate arrangements while developing countries utilize capital controls, which can mitigate the impact of US monetary policy shocks more effectively.

Suggested Citation

  • Ma, Zhenyu & Wang, Junbo & Wang, Ning & Xiao, Zehua, 2024. "US monetary policy and real exchange rate dynamics: the role of exchange rate arrangements and capital controls," Economics Letters, Elsevier, vol. 242(C).
    • Handle: RePEc:eee:ecolet:v:242:y:2024:i:c:s0165176524003756
    DOI: 10.1016/j.econlet.2024.111891
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    More about this item

    Keywords

    US monetary policy; Real exchange rate; Exchange rate arrangements; Capital controls;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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