The exchange rate insulation puzzle

Giancarlo Corsetti, Keith Kuester, Gernot Müller and Sebastian Schmidt

No 2630, Working Paper Series from European Central Bank

Abstract: We confront the notion that flexible rates insulate a country from external disturbances with new evidence on spillovers from euro-area shocks to neighboring countries. We find that in response to euro-area shocks, spillovers are not smaller, and currency movements not significantly larger, in countries that float their currency, relative to those that peg to the euro—the insulation puzzle. Unconditionally, however, currency volatility is significantly higher for floaters. A state-of-the-art open-economy model can fit our conditional evidence on lack of insulation, provided monetary policy targets headline inflation, but only at the cost of missing the unconditional evidence on currency volatility. JEL Classification: F41, F42, E31

Keywords: exchange-rate disconnect; exchange-rate regime; external shock; insulation; international spillovers (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-opm
Note: 2179645
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2630~94d9b91ed7.en.pdf (application/pdf)

Related works:
Working Paper: The Exchange Rate Insulation Puzzle (2021)
Working Paper: The Exchange Rate Insulation Puzzle (2021)
Working Paper: The Exchange Rate Insulation Puzzle (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212630

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().