How does monetary policy respond to exchange rate movements? New international evidence
AbstractThis 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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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2008/15.
Length: 45 pages
Date of creation: 22 Oct 2008
Date of revision:
Exchange rate; monetary policy; SVAR; Bayesian estimation; sign restrictions;
Other versions of this item:
- Hilde C. Bjørnland & Jørn I. Halvorsen, 2010. "How does monetary policy respond to exchange rate movements? New international evidence," Working Papers 0001, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-28 (All new papers)
- NEP-CBA-2008-10-28 (Central Banking)
- NEP-IFN-2008-10-28 (International Finance)
- NEP-MAC-2008-10-28 (Macroeconomics)
- NEP-MON-2008-10-28 (Monetary Economics)
- NEP-OPM-2008-10-28 (Open Economy Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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