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Exchange Rate Dynamics and Monetary Spillovers with Imperfect Financial Markets

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  • Özge Akinci
  • Albert Queralto

Abstract

We develop a quantitative model with imperfections in domestic and international financial markets that generates strong effects of U.S. monetary policy on emerging markets (EMs). Financial imperfections prevent arbitrage both between local EM lending and borrowing rates, and between local-currency and dollar borrowing rates. An adverse feedback effect between financial health and external conditions amplifies the domestic “financial accelerator,” leading to large cross-border spillovers of U.S. monetary policy shocks. The model implies a link between uncovered interest parity violations and local credit spreads, a prediction we show the data strongly supports.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Özge Akinci & Albert Queralto, 2024. "Exchange Rate Dynamics and Monetary Spillovers with Imperfect Financial Markets," The Review of Financial Studies, Society for Financial Studies, vol. 37(2), pages 309-355.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:2:p:309-355.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad078
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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