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Heterogeneous international monetary transmissions: The role of inflation

Author

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  • Li, Jie
  • Meng, Xiangyuan
  • Zhang, Liqing
  • Zhou, Tianhang

Abstract

In the context of the trilemma hypothesis, we document heterogeneous international monetary transmissions, emphasizing the essential role of inflation. Periphery countries' monetary policy autonomy is subject to their inflation. Facing an interest rate hike of a center country, periphery countries are more willing to follow when their inflation levels are high. Following an interest rate hike helps ease periphery countries' domestic inflation pressure. In contrast, those countries with low inflation are more inclined to follow the center country's interest rate cut. We further confirm that periphery countries' monetary policy autonomy is enhanced by capital controls and flexible exchange regimes, consistent with the trilemma hypothesis.

Suggested Citation

  • Li, Jie & Meng, Xiangyuan & Zhang, Liqing & Zhou, Tianhang, 2023. "Heterogeneous international monetary transmissions: The role of inflation," Journal of International Money and Finance, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:jimfin:v:138:y:2023:i:c:s0261560623001365
    DOI: 10.1016/j.jimonfin.2023.102935
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    References listed on IDEAS

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    1. Michael W. Klein & Jay C. Shambaugh, 2015. "Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 33-66, October.
    2. Sebastian Edwards, 2012. "The Federal Reserve, the Emerging Markets, and Capital Controls: A High-Frequency Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 151-184, December.
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    More about this item

    Keywords

    International monetary transmission; Inflation; Trilemma;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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