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Interpreting Currency Movements During the Crisis

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Author Info

  • Thomas Dowling
  • Nicoletta Batini

Abstract

Using an adaptation of the Uncovered Interest Parity (UIP) condition, this paper analyzes the drivers behind the large, symmetric exchange rate swings observed during the financial crisis of 2008-2010. Employing a Nelson-Siegel model, we estimate yield curves and decompose the exchange rate movements into changes we attribute to monetary policy and a residual. We find that the depreciation phase of the currencies in our sample was largely dominated by safe-haven effects rather than carry trade activity or other return considerations. For some countries, however, the appreciation that began at the end of 2008 seems largely to reflect downward movement in the cumulative revisions to nominal forward differentials, suggesting carry trade.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/14.

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Length: 44
Date of creation: 01 Jan 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/14

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Related research

Keywords: Interest rates; Exchange rates; Developed countries; Economic models; Emerging markets; Exchange rate adjustments; Global Financial Crisis 2008-2009; exchange rate; monetary policy; exchange rate movements; inflation; bilateral exchange rates; foreign exchange; bilateral exchange rate; nominal interest rate; exchange rate changes; real interest rates; exchange rate movement; currency markets; currency risk; exchange rate expectations; real interest rate; exchange rate volatility; spot exchange rate; nominal exchange rate; real exchange rate; nominal exchange rates; exchange rate change; current exchange rates; log exchange rate; real variables; nominal effective exchange rate; monetary economics; floating exchange rate; effective exchange rate; spot exchange rates; real rates; real exchange rate expectations; exchange rate developments; exchange rate data; nominal variables; foreign exchange rate; foreign currency; rational expectations;

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  1. Leo Krippner & Leif Anders Thorsrud, 2009. "Forecasting New Zealand's economic growth using yield curve information," Reserve Bank of New Zealand Discussion Paper Series DP2009/18, Reserve Bank of New Zealand.
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