Most empirical studies indicate that countries with floating exchange rates have greater possibilities to dampen the effect on their own economies of global financial and monetary forces than countries with fixed exchange rates do. 5 In this sense, the trilemma still stands. 3  See Rey (2013). 4  See Rey (2013). 5  See, for example, Aizenman et al. (2015) and Obstfeld (2015). For a current review of empirical research, see Anaya and Hachula (2016). 4  BIS central bankers’ speeches  There may also be reason to reflect over what is actually meant by monetary policy autonomy. A high degree of covariation in countries’ interest rates may be an indication that small countries must follow the monetary policy of larger countries. But it could also mean that all central banks, large and small, react to synchronised economic conditions – that the covariation is largely due to fundamental factors that all are exposed to. In the latter case, it would be misleading to suggest that monetary policy in small countries is not autonomous – it does react to circumstances in the home country, even if these greatly coincide with international developments. A more relevant definition of restricted autonomy would be a situation in which monetary policy in large countries forces small countries to respond in a way that is not compatible with their own economic development.
It is thus important to try to find out to which degree an observed covariation in interest rates depends on restricted monetary policy autonomy in small countries according to this definition or on synchronised economic circumstances. Unfortunately, this is also difficult. 6 Weaker interest rate channel but stronger exchange rate channel? One interesting hypothesis in research into monetary policy and globalisation is that globalisation has not necessarily led to a weakening of the monetary policy transmission mechanism, as could spontaneously be suspected, but rather that the impact has changed character. More specifically, monetary policy’s interest rate channel can certainly be expected to become weaker as financial integration increases, as domestic actors find it easier to smooth their consumption over time by borrowing abroad. On the other hand, the exchange rate channel may become more effective. One reason for this is that the increased integration has also made it more common for domestic actors to hold foreign assets. When the exchange rate changes, the value of these assets also changes. The central bank can therefore also influence demand in the economy this way. An interest rate rise that strengthens the exchange rate leads to a decrease in the value of these foreign assets – a wealth effect that strengthens the normal exchange rate channel with reduced exports and increased imports. Some analysts claim that it cannot be ruled out that the net effect of a weaker interest rate channel and stronger exchange rate channel has been to make monetary policy more efficient, rather than less.