Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228863
Authors: 
Corsetti, Giancarlo
Kuester, Keith
Müller, Gernot J.
Schmidt, Sebastian
Year of Publication: 
2021
Series/Report no.: 
ECONtribute Discussion Paper No. 060
Abstract: 
The notion that flexible exchange rates insulate a country from foreign shocks is well grounded in theory, from the classics (Meade, 1951; Friedman 1953), to the more recent open economy literature (Obstfeld and Rogo, 2000). We confront it with new evidence from Europe. Specifically, we study how shocks that originate in the euro area spill over to its neighboring countries. We exploit the variation of the exchange rate regime across time and countries to assess whether the regime alters the spillovers: it does not-flexible exchange rates fail to provide insulation against euro area shocks. This result is robust across a number of specifications and holds up once we control for global financial conditions. We show that the workhorse open-economy model can account for the lack of insulation under a float, assuming that central banks respond to headline consumer price inflation. However, it remains puzzling that policy makers are ready to forego stabilization of economic activity to the extent we found in the data.
Subjects: 
External shock
International spillovers
Exchange rate
Insulation
Monetary Policy
Dominant currency pricing
Effective lower bound
JEL: 
F41
F42
E31
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.