In a keynote speech delivered on October 30th in Geneva at the conference on “Exchange rate policy,” jointly organized by the Graduate Institute Geneva’s Centre for Finance and Development and the Swiss Department of Economic Affairs, Professor Chinn discussed the implications of the trilemma – the proposition that a country cannot simultaneously achieve full exchange rate stability, monetary policy autonomy, and capital market integration – for the effect of policy tightening in the US on emerging markets. A similar topic was examined by Chinn at a recent workshop at the Bank of England’s Centre for Central Banking Studies.
Chinn, with his coauthors Joshua Aizenman (USC) and Hiro Ito (Portland State), conclude that the extent to which emerging market economies, such as Brazil and Turkey, experience financial stress depends upon the degree to which they rigidly control their exchange rates, and the strength of trade links with the US, the euro area, and Japan. Not only do rising interest rates in the US put downward pressure on emerging market currencies and foreign exchange reserves, or upward pressure on interest rates; the recent appreciation of the US dollar has perhaps had even greater impact. The methodology underlying these findings were reported in Chinn’s Econbrowser blog, as well as this working paper.
Chinn earlier presented his findings on this subject at Peking University’s China Center for Economic Research and Leipzig University.