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Monetary policy and the exchange rate: Evidence from a two-country model

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Author Info

  • Voss, G.M.
  • Willard, L.B.

Abstract

We present a two-country structural VAR model of monetary policy and the exchange rate for the US and Australia that allows us to identify both US and Australian monetary policy innovations. A key finding is the asymmetry in the effects of these innovations on the exchange rate, both the nature of the response and their relative importance. A second key finding is evidence of exchange rate disconnect: innovations to the real economy explain little of the variation in the exchange rate. We also consider the effects of exchange rate innovations and find evidence of slow but substantial pass through to domestic prices with evidence that the response of monetary policy is at least partially responsible for the slow adjustment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 31 (2009)
Issue (Month): 4 (December)
Pages: 708-720

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Handle: RePEc:eee:jmacro:v:31:y:2009:i:4:p:708-720

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Monetary policy International monetary transmission mechanism Exchange rates Exchange rate disconnect;

References

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  1. David B. Gordon & Eric M. Leeper, 1993. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 93-5, Federal Reserve Bank of Atlanta.
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Citations

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Cited by:
  1. Tomas Havranek & Marek Rusnak, 2012. "Transmission Lags of Monetary Policy: A Meta-Analysis," Working Papers IES 2012/27, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2012.
  2. Kang-Soek Lee & Philippe Saucier, 2011. "Should the UK Join the Euro Zone? Evidence from a Synthetic OCA Assessment," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 8(1), pages 77-96, June.
  3. Moosa, Imad & Burns, Kelly, 2014. "The unbeatable random walk in exchange rate forecasting: Reality or myth?," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 69-81.
  4. Heinlein, Reinhold & Krolzig, Hans-Martin, 2012. "On the construction of two-country cointegrated VAR models with an application to the UK and US," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62310, Verein für Socialpolitik / German Economic Association.
  5. Dungey, Mardi & Osborne, Denise, 2013. "International Transmissions to Australia: The Roles of the US and Euro Area," Working Papers 17208, University of Tasmania, School of Economics and Finance, revised 16 Oct 2013.
  6. Jiang, Jiadan & Kim, David, 2013. "Exchange rate pass-through to inflation in China," Economic Modelling, Elsevier, vol. 33(C), pages 900-912.

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