Global liquidity and monetary policy autonomy: An examination of open-economy policy constraints

Arbeitspapier

This paper examines the monetary policy constraints facing economies on a fixed peg or managed float regime, contrasting the Mundell-Fleming Trilemma view against the Compensation view commonly found at central banks. While the former holds that foreign exchange inflows and outflows affect the domestic money base, constraining monetary policy under non-floating regimes unless capital controls are adopted, the latter purports that endogenous sterilisation of foreign exchange flows invalidates this trade-off. The predictions of both theories are empirically evaluated for five East Asian economies using central bank balance sheets, vector error correction models and impulse response functions. The findings indicate that the dynamics for the economies studied correspond more closely to the Compensation view than the Trilemma view, suggesting that it is a sustained loss of foreign ex-change reserves that imposes a relevant constraint on autonomy rather than the adoption of a non-floating exchange rate regime.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IMK Working Paper ; No. 159

Classification and Topics

• Classification: Wirtschaft ; Money Supply; Credit; Money Multipliers ; Central Banks and Their Policies ; Open Economy Macroeconomics
• Subject: central banking ; balance sheets ; monetary policy ; exchange rates ; policy autonomy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Angrick, Stefan
• Event: Veröffentlichung
• (who): Hans-Böckler-Stiftung, Institut für Makroökonomie und Konjunkturforschung (IMK)
• (where): Düsseldorf
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/142718
• URN: urn:nbn:de:101:1-201602195063
• Last update: 10.03.2025, 11:43 AM CET