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Exchange Rates and Monetary Spillovers

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  • Guillaume Plantin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Tepper School of Business - CMU - Carnegie Mellon University [Pittsburgh])

  • Hyun Song Shin

    (Princeton University)

Abstract

When does the combination of flexible exchange rates and inflation-targeting monetary policy guarantee insulation from global financial conditions? We examine a dynamic global game model of international investment flows where, for some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by abrupt reversals where capital outflows go hand-in-hand with currency depreciation, a domestic bond market crash, and inflationary pressure.

Suggested Citation

  • Guillaume Plantin & Hyun Song Shin, 2016. "Exchange Rates and Monetary Spillovers," SciencePo Working papers Main hal-03393218, HAL.
    • Handle: RePEc:hal:spmain:hal-03393218
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03393218
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    Cited by:

    1. Martina Jašová & Richhild Moessner & Elöd Takáts, 2019. "Exchange Rate Pass-Through: What Has Changed Since the Crisis?," International Journal of Central Banking, International Journal of Central Banking, vol. 15(3), pages 27-58, September.
    2. Bernardo Guimaraes & Gabriel Jardanovski, 2022. "Who matters in dynamic coordination problems?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(3), pages 452-469, June.
    3. Bernardo Guimaraes & Caio Machado & Ana E. Pereira, 2020. "Dynamic coordination with timing frictions: Theory and applications," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(3), pages 656-697, June.
    4. Siklos, Pierre L., 2018. "Boom-and-bust cycles in emerging markets: How important is the exchange rate?," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 172-187.
    5. Hasselgren, Anton & Peltomäki, Jarkko & Graham, Michael, 2020. "Speculator activity and the cross-asset predictability of FX returns," International Review of Financial Analysis, Elsevier, vol. 72(C).
    6. Yang Zhao & Zichun Xu, 2021. "The Impact of Cross-Border Capital Flows on the Chinese Banking System," SAGE Open, , vol. 11(2), pages 21582440211, June.
    7. Goczek, Łukasz & Partyka, Karol J., 2019. "Too small to be independent? On the influence of ECB monetary policy on interest rates of the EEA countries," Economic Modelling, Elsevier, vol. 78(C), pages 180-191.

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    More about this item

    Keywords

    Currency appreciation; Capital flows; Global games;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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