This presentation by Ambrogio Cesa-Bianchi (Bank of England and CEPR) is on Capital Flows and Exchange Rates: A Quantitative Assessment of the Dilemma Hypothesis.
In response to an unanticipated monetary policy tightening in the US, what happens to real GDP and exports of a typical small open economy? When considering the monetary policy tightening cycle in advanced economies, there is a renewed interest in the cross-country transmission of financial flows linked to the preceding shocks. Research in the past has debated whether or not a flexible exchange rate provides enough insulation to the shocks, and also whether or not additional monetary policy instruments (such as a tax on foreign liabilities or a tax on total credit) are necessary for domestic monetary policy independence.
This research revisits these questions using an estimate open economy DSGE model. How does contractionary monetary policy impact the domestic economy and exchange rate? How does pegging an exchange rate impact macroeconomic volatility? And how do additional monetary policy instruments fair?
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