Abstract
At the outset of the Great Recession emerging in 2007, central banks of major-currency economies have adopted non-standard monetary policies. We examine whether and to what extent these measures pose a challenge to central banking in emerging and small open economies. In particular we assess how global liquidity spillovers caused by major central banks affect the economic dynamics of emerging and small open economies. In this respect, economies which are close to or even at the periphery of major-currency economies are particularly prone to “unbalanced” real exchange rate dynamics. In the short run, corresponding level and volatility effects in key relative prices may endanger financial stability in the recipient country. The long-term effects include a metamorphosis of the anchoring of private-sector inflation expectations into a perilous tightrope act in central banking of these economies.
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Notes
The Polity IV Annual Time-Series contains information on regime and authority characteristics of all independent states with a total population of 500,000 or more and covering the years 1800–2015. The dataset is available here: http://www.systemicpeace.org/inscrdata.html.
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The paper was written when the corresponding author was a visiting scholar at Eesti Pank, Tallinn, Estonia. The content is solely the responsibility of the authors and does not necessarily represent the official views of the DIHK.
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Belke, A., Fahrholz, C. Emerging and small open economies, unconventional monetary policy and exchange rates – a survey. Int Econ Econ Policy 15, 331–352 (2018). https://doi.org/10.1007/s10368-017-0395-1
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DOI: https://doi.org/10.1007/s10368-017-0395-1