Do flexible exchange rates matter for monetary autonomy?

Abstract

This paper studies the impact of exchange rate regimes on monetary autonomy, by applying a propensity score matching (PSM) model for 174 countries over the period 1970–2017. The PSM technique, that we used here to account for self-selection bias and endogeneity, reveals that the average treatment effect of flexible exchange rates on monetary autonomy is statistically significant, providing support for the impossible trinity. We also find that the effect of flexible exchange rates on monetary autonomy is more prominent in advanced economies than in emerging and developing ones. Furthermore, we show that the global financial recession (GFC) affects the monetary autonomy responses to flexible exchange rates. In particular, the GFC causes an increase in the level of monetary autonomy in countries adopting flexible exchange rates during the post-crisis period.