Dynamics of monetary policy spillover: The role of exchange rate regimes

In a time-varying framework, our study investigates the role of exchange rate regimes in explaining monetary policy spillover across a set of AEs and EMEs. We also investigate the channels contributing to the dynamism in the degree of such spillover. We find that the flexible exchange rate regime in the AEs insulates them against the spillover to a relatively larger extent as compared to the managed float regime in the EMEs. We also find that the spillover is strongly time-varying, being influenced by macroeconomic conditions in the centre economy. Risk-taking, portfolio rebalancing, and signaling channels are found to be significant in explaining the rise in spillover in the EMEs, but not in the AEs. The rise in the connectedness of interest rates in the AEs occurred only during the global financial crisis (2008–12), owing to their higher policy coordination with the US. This should not be misconstrued as monetary policy spillover.