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Monetary spillovers and real exchange rate misalignments in emerging markets

Author

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  • Krittika Banerjee
  • Ashima Goyal

Abstract

Purpose - After the adoption of unconventional monetary policies (UMPs) in advanced economies (AEs) there were many studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extent of contribution of EMEs and AEs, respectively, in real exchange rate (RER) misalignments has not been addressed. This paper addresses the gap in a cross-country panel set-up with country specific controls. Design/methodology/approach - Fixed effects, pooled mean group (Pesaranet al., 1999) and common correlated effects (Pesaran, 2006) estimations are used to examine the relationship. Multiway clustering is taken into account to ensure robust statistical inferences. Findings - Robust evidence is found for significant monetary spillovers over 1998–2017 in the form of RER overvaluation of EMEs against AEs, especially through the portfolio rebalancing channel. EME RER against the US saw significantly more overvaluation in UMP years indicating greater role of the US in monetary spillovers. However, in the long-run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER. Research limitations/implications - It may be useful for large EMEs to monitor the impact of foreign portfolio flows on short-run deviations in RER. Export diversification reduces EME mercantilist motives against the US. That AE monetary policy significantly appreciates EME RER has implications for future policy cooperation between EMEs and AEs. Originality/value - To the best of the author's knowledge such a comparative analysis between AE and EME policy variables on RER misalignment has not been done previously.

Suggested Citation

  • Krittika Banerjee & Ashima Goyal, 2020. "Monetary spillovers and real exchange rate misalignments in emerging markets," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 17(2), pages 452-484, October.
    • Handle: RePEc:eme:ijoemp:ijoem-02-2020-0192
    DOI: 10.1108/IJOEM-02-2020-0192
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    3. Krittika Banerjee & Ashima Goyal, 2021. "Current account imbalances: Exploring role of domestic and external factors for large emerging markets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2021-001, Indira Gandhi Institute of Development Research, Mumbai, India.
    4. Michael Takudzwa Pasara & Vincent Mugwira, 2023. "Exchange Rate (MIS-) Alignment: An Application of the Behavioural Equilibrium Exchange Rate (beer) Approach to Zimbabwe (1990-2018)," International Journal of Economics and Financial Issues, Econjournals, vol. 13(5), pages 128-141, September.

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    More about this item

    Keywords

    Cluster robust; Common correlated effects; Mercantilist; Monetary spillovers; Pooled mean group; Precautionary;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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