Exchange Rate Insulation Revisited

2026

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AI-generated summary

1) This paper finds that flexible exchange rates do not provide insulation from Euro Area monetary policy shocks, challenging conventional economic wisdom.
2) The study analyzes spillovers from EA monetary policy shocks to 20 neighboring countries, distinguishing between pegged and floating exchange rate regimes. It employs high-frequency data to examine immediate responses and business cycle frequency data to assess macroeconomic outcomes. The research also utilizes a state-of-the-art HANK model to explain the observed lack of insulation, highlighting the role of household heterogeneity and trade openness in transmission channels.
3) Exchange rate regimes, Monetary policy, Spillovers, Insulation, HANK model

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