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Monetary policy’s rising FX impact in the era of ultra-low rates

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  • Ferrari, Massimo
  • Kearns, Jonathan
  • Schrimpf, Andreas

Abstract

We show that the impact of monetary policy on exchange rates has been growing significantly in recent years. Our results are established by a high-frequency event study of how key fixed income instruments with different maturities respond jointly with exchange rates to monetary policy news from six major central banks. Across countries, news affecting short-term maturity bonds tend to have the strongest impact, highlighting the relevance of communication regarding the path of future monetary policy for exchange rate movements even when policy rates are near their lower bound. We find that the FX impact of monetary policy is state-dependent and is stronger the lower is the level of interest rates, in line with a greater effect through currency risk premia.

Suggested Citation

  • Ferrari, Massimo & Kearns, Jonathan & Schrimpf, Andreas, 2021. "Monetary policy’s rising FX impact in the era of ultra-low rates," Journal of Banking & Finance, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:jbfina:v:129:y:2021:i:c:s037842662100100x
    DOI: 10.1016/j.jbankfin.2021.106142
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    More about this item

    Keywords

    Exchange rates; Unconventional monetary policy; Event study; High frequency data;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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