DP12696 | Global Financial Cycles and the Exchange Rate Regime: A Perspective from Emerging Markets

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This paper examines the relevance of exchange rate regimes in the transmission of global financial shocks to domestic financial and macroeconomic conditions. Our findings suggest that even in today’s highly financially integrated world, the nominal exchange rate regime does matter—at least for emerging market economies. The transmission of global financial shocks to domestic variables is magnified under fixed exchange rate regimes relative to more flexible regimes. For advanced economies, however, the jury is still out, as the recent paucity of truly fixed regimes among these economies poses a challenge for estimating the effect of exchange rate flexibility.