Type
Article
Title
Exchange Rates and Monetary Spillovers
Author(s)
PLANTIN Guillaume - Département d'économie (Author)
SHIN Hyun Song - Princeton University (Author)
Editor
Bank for International Settlements
Volume
13
Number
2
Pages
637 - 666 p.
ISSN
19336837
DOI
10.3982/TE2669
Keywords
Currency appreciation, Capital flows, Global games
Abstract
EN
When do flexible exchange rates prevent monetary and financial conditions from spilling over across currencies? We examine a model in which international investors strategically supply capital to a small inflation‐targeting economy with flexible exchange rates. 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 reversals where capital outflows go hand‐in‐hand with currency depreciation, a rise in domestic interest rates, and inflationary pressure. Arbitrarily small shocks to global financial conditions suffice to trigger these dynamics.
BIBLIOGRAPHIC QUOTE
EXPORT