Monetary policy spillovers under intermediate exchange rate regimes

摘要

Testing the international Trilemma traditionally relies on discretely classified exchange rate regimes. This simplification limits the implications drawn for middle-ground policies like managed floats or basket pegs, and inhibits inference on the empirical shape of the exchange rate stability - monetary autonomy trade-off. To address these issues, this paper proposes a continuous measure of exchange rate flexibility for estimating monetary policy spillovers along the entire spectrum of peg intensities. Monetary spillovers generally increase with exchange rate stability, even within middle ground policies, and basket pegs diversify such spillovers. I then estimate the empirical shape of the trade-off using machine learning techniques, finding that the relationship between monetary autonomy and exchange rate stability is significantly non-linear in both advanced economies and emerging markets. Specifically, partially targeting the exchange rate translates to disproportionately smaller or larger monetary spillovers along middle-ground exchange rate regimes. For emerging markets in particular, active reserves management is a key mechanism associated with these non-linearities. (C) 2020 Elsevier Ltd. All rights reserved.