Edited by Masahiro Kawai, Peter J. Morgan and Shinji Takagi
Chapter 4: International Monetary Transmission and Exchange Rate Regimes: Floaters vs Non-floaters in East Asia
Soyoung Kim and Doo Yong Yang 4.1 INTRODUCTION Changes in United States (US) interest rates have a strong impact on economic conditions in other countries. With the increasing globalization of most countries in the world, the influence of US monetary shocks has been a major concern in developed as well as developing countries. The mechanism of international monetary transmission has a long history of debate. The Mundell–Fleming framework for analyzing the impacts of monetary and fiscal policy in an open economy shows that monetary expansion raises domestic production and income, but the monetary expansioninduced boom at home is at the expense of the foreign country, through the expenditure-switching mechanism under perfect capital mobility and a floating exchange rate regime. However, empirical evidence shows that the effects of US monetary policy has positive spillover effects on the non-US Group of Seven1 countries’ output and demand (Kim 2001). In this regard, modern sticky price models can theoretically reproduce the positive spillover effects of US monetary expansion on foreign output (Obstfeld and Rogoff 1995; Betts and Devereux 2001). However, different transmission channels can be formed in response to external monetary shocks under different exchange rate regimes. Di Giovanni and Shambaugh (2008) concluded that only in countries with currency pegs is real gross domestic product (GDP) growth affected by external monetary shocks. Countries with a free-floating rate regime show no relationship between real GDP growth and interest rates in the base country. They concluded that the main transmission channel is interest rates, in...
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