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The Dollar During the Great Recession: US Monetary Policy Signaling and The Flight To Safety

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  • Stavrakeva, Vania
  • Tang, Jenny

Abstract

Conventional wisdom holds that lowering a home country’s interest rate relative to another’s will depreciate the domestic currency. We document that US monetary policy easings actually had the opposite effect during the Great Recession. We attribute this effect to calendar-based forward guidance that signaled economic weakness which resulted in a flight-to-safety effect and lower expected inflation in the United States. Our results imply that accusations that the Federal Reserve engaged in a “competitive devaluation†over the Great Recession were unfounded.

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  • Stavrakeva, Vania & Tang, Jenny, 2019. "The Dollar During the Great Recession: US Monetary Policy Signaling and The Flight To Safety," CEPR Discussion Papers 14034, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14034
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    Cited by:

    1. Lloyd, S. P. & Marin, E. A., 2019. "Exchange Rate Risk and Business Cycles," Cambridge Working Papers in Economics 1996, Faculty of Economics, University of Cambridge.
    2. Nelson Camanho & Harald Hau & Hélène Rey, 2022. "Global Portfolio Rebalancing and Exchange Rates," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 5228-5274.
    3. Pflueger, Carolin & Rinaldi, Gianluca, 2022. "Why does the Fed move markets so much? A model of monetary policy and time-varying risk aversion," Journal of Financial Economics, Elsevier, vol. 146(1), pages 71-89.
    4. Miranda-Agrippino, Silvia & Nenova, Tsvetelina, 2022. "A tale of two global monetary policies," Journal of International Economics, Elsevier, vol. 136(C).
    5. Kerstin Bernoth & Helmut Herwartz & Lasse Trienens, 2023. "The Impacts of Global Risk and US Monetary Policy on US Dollar Exchange Rates and Excess Currency Returns," Discussion Papers of DIW Berlin 2037, DIW Berlin, German Institute for Economic Research.
    6. Santiago Camara, 2021. "Spillovers of US Interest Rates: Monetary Policy & Information Effects," Papers 2111.08631, arXiv.org, revised Feb 2023.
    7. Tang, Jenny, 2019. "Comment on “The long-run information effect of Central Bank communication” by Stephen Hansen, Michael McMahon, and Matthew Tong," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 203-210.
    8. Konstantin Egorov & Dmitry Mukhin, 2020. "Optimal Policy under Dollar Pricing," Working Papers w0261, New Economic School (NES).
    9. Cesa-Bianchi, Ambrogio & Sokol, Andrej, 2022. "Financial shocks, credit spreads, and the international credit channel," Journal of International Economics, Elsevier, vol. 135(C).
    10. Santiago Camara, 2021. "US Spillovers of US Monetary Policy: Information effects & Financial Flows," Papers 2108.01026, arXiv.org.

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    JEL classification:

    • 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
    • G01 - Financial Economics - - General - - - Financial Crises

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