Exchange Rates and Monetary Spillovers

Guillaume Plantin (1, 2) , Hyun Song Shin (3)

1 ECON - Département d'économie (Sciences Po)
2 Tepper School of Business
3 Princeton University

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.

Mots clés: Currency appreciation; Capital flows; Global games

Domaines: Economies et finances

Guillaume Plantin, Hyun Song Shin. Exchange Rates and Monetary Spillovers. 2016. ⟨hal-03393218⟩