NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Monetary Policy and the Predictability of Nominal Exchange Rates

Martin Eichenbaum, Benjamin K. Johannsen, Sergio Rebelo

NBER Working Paper No. 23158
Issued in February 2017, Revised in August 2019
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

This paper studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about inflation-targeting countries. First, the current real exchange rate predicts future changes in the nominal exchange rate. Second, the real exchange rate is a poor predictor of future inflation rates. We estimate a medium-size DSGE open-economy model that accounts quantitatively for these facts as well as other empirical properties of real and nominal exchange rates. The key estimated shocks that accounts for the dynamics of exchange rates and their covariance with inflation are disturbances to the foreign demand for dollar-denominated bonds.

download in pdf format
   (433 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w23158

Users who downloaded this paper also downloaded* these:
Ilzetzki, Reinhart, and Rogoff w23135 The Country Chronologies to Exchange Rate Arrangements into the 21st Century: Will the Anchor Currency Hold?
Cravino and Haltenhof w23705 Real Exchange Rates, Income per Capita, and Sectoral Input Shares
Cheung, Chinn, Garcia Pascual, and Zhang w23267 Exchange Rate Prediction Redux: New Models, New Data, New Currencies
Ilzetzki, Reinhart, and Rogoff w23134 Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?
Du, Tepper, and Verdelhan w23170 Deviations from Covered Interest Rate Parity
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us