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How does monetary policy respond to exchange rate movements? New international evidence

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Author Info
Hilde C. Bjørnland () (Department of Economics, Norwegian School of Management (BI)
Jørn I. Halvorsen (Norwegian School of Economics and Business Administration)

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Abstract

This paper analyzes how monetary policy responds to exchange rate movements in open economies, paying particular attention to the two-way interaction between monetary policy and exchange rate movements. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Our suggested identification scheme allows for a imultaneous reaction between the variables that are observed to respond intraday to news (the interest rate and the exchange rate), but maintains the recursive order for the traditional macroeconomic variables (GDP and inflation). Doing so, we find strong interaction between monetary policy and exchange rate variation. Our results suggest more theory consistency in the monetary policy responses than what has previously been reported in the literature.

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Publisher Info
Paper provided by Norges Bank in its series Working Paper with number 2008/15.

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Length: 45 pages
Date of creation: 22 Oct 2008
Date of revision:
Handle: RePEc:bno:worpap:2008_15

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Related research
Keywords: Exchange rate; monetary policy; SVAR; Bayesian estimation; sign restrictions;

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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This page was last updated on 2009-11-19.

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