Monetary spillovers and real exchange rate misalignments in emerging markets
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 21 October 2020
Issue publication date: 26 January 2022
Abstract
Purpose
After the adoption of unconventional monetary policies (UMPs) in advanced economies (AEs) there were many studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extent of contribution of EMEs and AEs, respectively, in real exchange rate (RER) misalignments has not been addressed. This paper addresses the gap in a cross-country panel set-up with country specific controls.
Design/methodology/approach
Fixed effects, pooled mean group (Pesaran et al., 1999) and common correlated effects (Pesaran, 2006) estimations are used to examine the relationship. Multiway clustering is taken into account to ensure robust statistical inferences.
Findings
Robust evidence is found for significant monetary spillovers over 1998–2017 in the form of RER overvaluation of EMEs against AEs, especially through the portfolio rebalancing channel. EME RER against the US saw significantly more overvaluation in UMP years indicating greater role of the US in monetary spillovers. However, in the long-run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER.
Research limitations/implications
It may be useful for large EMEs to monitor the impact of foreign portfolio flows on short-run deviations in RER. Export diversification reduces EME mercantilist motives against the US. That AE monetary policy significantly appreciates EME RER has implications for future policy cooperation between EMEs and AEs.
Originality/value
To the best of the author's knowledge such a comparative analysis between AE and EME policy variables on RER misalignment has not been done previously.
Keywords
Acknowledgements
Constructive inputs from anonymous referees are gratefully acknowledged. The authors are also grateful to Professors Saibal Kar and Subrata Sarkar for useful comments and to Ms. Reshma Aguiar for secretarial assistance.Conflicts of interest: This research did not receive any specific grant from funding agencies in the public, commercial or not-for-profit sectors.
Citation
Banerjee, K. and Goyal, A. (2022), "Monetary spillovers and real exchange rate misalignments in emerging markets", International Journal of Emerging Markets, Vol. 17 No. 2, pp. 452-484. https://doi.org/10.1108/IJOEM-02-2020-0192
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited