Arbeitspapier
The exchange rate insulation puzzle
We confront the notion that flexible rates insulate a country from external disturbances with new evidence on spillovers from euro-area shocks to neighboring countries. We find that in response to euro-area shocks, spillovers are not smaller, and currency movements not significantly larger, in countries that float their currency, relative to those that peg to the euro - the insulation puzzle. Unconditionally, however, currency volatility is significantly higher for floaters. A state-of-the-art open-economy model can fit our conditional evidence on lack of insulation, provided monetary policy targets headline inflation, but only at the cost of missing the unconditional evidence on currency volatility.
- ISBN
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978-92-899-4917-0
- Language
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Englisch
- Bibliographic citation
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Series: ECB Working Paper ; No. 2630
- Classification
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Wirtschaft
Open Economy Macroeconomics
International Policy Coordination and Transmission
Price Level; Inflation; Deflation
- Subject
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Exchange-rate regime
Insulation
External shock
International spillovers,Exchange-rate disconnect
- Event
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Geistige Schöpfung
- (who)
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Corsetti, Giancarlo
Küster, Keith
Müller, Gernot J.
Schmidt, Sebastian
- Event
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Veröffentlichung
- (who)
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European Central Bank (ECB)
- (where)
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Frankfurt a. M.
- (when)
-
2021
- DOI
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doi:10.2866/002227
- Handle
- Last update
-
10.03.2025, 11:44 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Corsetti, Giancarlo
- Küster, Keith
- Müller, Gernot J.
- Schmidt, Sebastian
- European Central Bank (ECB)
Time of origin
- 2021