The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates
What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy periods in the US by using a novel identification procedure that defines monetary policy shocks as changes in the whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substantial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents' expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis.
Supported by the Fundacion BBVA scientific research grant (PR16 DAT 0043) on Analysis of Big Data in Economics and Empirical Applications and the Cerca Programme/Generalitat de Catalunya. We thank Jordi Galí, Refet Gürkaynak, James Morley, Giovanni Ricco, Jonathan Wright, seminar participants at the 2018 ISoM conference, 2018 ASSA, UCL, Tor Vergata, Bank of Russia, the 2018 Royal Economic Society conference as well as Lukas Hoesch for excellent research assistance and Silvia Miranda-Agrippino for help with the UK data. The Barcelona GSE acknowledges financial support from the Spanish ministry of the Economy and Competitiveness through the Severo Ochoa Programme for Centers of Excellence in R&D (SEV-2015-0563). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates, Atsushi Inoue, Barbara Rossi. in NBER International Seminar on Macroeconomics 2018, Galí and West. 2019
Atsushi Inoue & Barbara Rossi, 2019. "The effects of conventional and unconventional monetary policy on exchange rates," Journal of International Economics, . citation courtesy of