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Verifying the Empirical Validity of the Trilemma using U.S. Monetary Shocks

Karimi, Mahtab | 2019

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  1. Type of Document: M.Sc. Thesis
  2. Language: Farsi
  3. Document No: 52159 (44)
  4. University: Sharif University of Technology
  5. Department: Management and Economics
  6. Advisor(s): Barakchian, Mahdi; Joshaghani, Hosein
  7. Abstract:
  8. According to the impossible trinity, countries can only enjoy from two of the following choices simultaneously: fixed exchange rate, free capital flow and independent monetary policy. A part of the economics literature has tried to verify the theory empirically. Some of the researches like Klein and Shambugh(2015) has concluded that the trilemma is valid on the occasion of transferring the effect of base countries interest rate changes to other countries. On the other side, a few papers like Ray(2013) has shown that an independent monetary policy can just be obtained by a closed capital flow and a float exchange rate system can not necessarily give central banks the autonomy of monetary policy.In the following research, we verify the validity of trilemma in the Klain and Shambugh(2015) framework. Using interest rate changes in the research can cause an endogeneity problem which leads to biased results. We take advantage of exogenous and unanticipated monetary policy shocks and eliminate this possible endogeneity. In the end, we show that the trilemma is valid for the exogenous and unanticipated US monetary shocks transmission from the U.S. to other countries of the world
  9. Keywords:
  10. Impossible Trilemma ; Exogenous Monetary Policy ; Exchange Rate ; Capital Constrained ; Exchange Rate Shocke

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