How does monetary policy respond to exchange rate movements? New international evidence
AbstractThis paper analyzes how monetary policy has responded to exchange rate movements in six open economies, paying particular attention to the two-way interaction between monetary policy and the exchange rate. 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 simultaneous reaction between the interest rates and the exchange rate. Doing so we find that, while there is a instantaneous reaction in the exchange rate following a monetary policy shock in all countries, monetary policy responds on impact to an exchange rate shock in only four of the six countries. While this suggests that the exchange rate is not equally important in the interest rate setting in all countries, we find that accounting for a potential interaction is still crucial when identifying monetary policy shocks in open economies structural VARs.
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Bibliographic InfoPaper provided by Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School in its series Working Papers with number 0001.
Length: 49 pages
Date of creation: Nov 2010
Date of revision:
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Exchange rate; monetary policy; SVAR; Bayesian estimation; sign restrictions.;
Other versions of this item:
- Hilde C. Bjørnland & Jørn I. Halvorsen, 2008. "How does monetary policy respond to exchange rate movements? New international evidence," Working Paper 2008/15, Norges Bank.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- 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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