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Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates

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Author Info
Eichenbaum, Martin
Evans, Charles L

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Abstract

This paper investigates the effects of shocks to U.S. monetary policy on exchange rates. We consider three measures of these shocks: orthogonalized shocks to the federal funds rate, orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the Romer and Romer index of monetary policy. In sharp contrast to the literature, we find substantial evidence of a link between monetary policy and exchange rates. Specifically, according to our results a contractionary shock to U.S. monetary policy leads to (1) persistent, significant appreciations in U.S. nominal and real exchange rates and (2) significant, persistent deviations from uncovered interest rate parity in favor of U.S. interest rates. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 110 (1995)
Issue (Month): 4 (November)
Pages: 975-1009
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Handle: RePEc:tpr:qjecon:v:110:y:1995:i:4:p:975-1009

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