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The Empirics of International Monetary Transmission: Identification and the Impossible Trinity


  • The authors acknowledge financial support from British Academy postdoctoral fellowships and a small grant from the University of Southampton for the purchase of data. This paper is a revised version of Oxford Department of Economics Working Paper 2006-290. We thank seminar participants at Brunel University, the Royal Economics Society 2008 Conference, and the Universities of Oxford, Southampton, and Warwick for their comments. We are particularly grateful to Jonathan Temple, Paul Evans, and two anonymous referees for suggestions that helped to significantly improve the paper. Any errors are ours.


The transmission of monetary policy across borders is central to many open economy models. Research has tried to evaluate the “impossible trinity” through estimating international interest rate linkages under alternative exchange rate regimes using realized base country interest rates. Such interest rates include anticipated and endogenous elements, which need not propagate internationally. We compare international interest rate responses under pegged and non-pegged regimes to identified, unanticipated, and exogenous U.S. interest rate changes and realized U.S. interest rate changes. We find important differences in estimated transmission from the two sets of measures—identified interest rate changes demonstrate a greater concordance with the impossible trinity than realized rate changes.