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Unconventional Policies and Exchange Rate Dynamics

Author

Listed:
  • Gustavo Adler
  • Mr. Ruy Lama
  • Juan Pablo Medina

Abstract

We study exchange rate dynamics under cooperative and self-oriented policies in a two-country DSGE model with unconventional monetary and exchange rate policies. The cooperative solution features a large exchange rate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policy instruments. Self-oriented policies (Nash equilibrium), however, entail limited exchange rate movements and an aggressive use of unconventional policies in both countries. Our results highlight the role of international policy cooperation in allowing the exchange rate to play the traditional role of shock absorber.

Suggested Citation

  • Gustavo Adler & Mr. Ruy Lama & Juan Pablo Medina, 2017. "Unconventional Policies and Exchange Rate Dynamics," IMF Working Papers 2017/237, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/237
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    Cited by:

    1. Gábor Dávid Kiss & Mercédesz Mészáros, 2020. "Gravity Among Central Bank Balance Sheets: Monetary Policy Spill-Over on FX Volatility," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 5(1), pages 33-57, June.
    2. Funashima, Yoshito, 2020. "Money stock versus monetary base in time–frequency exchange rate determination," Journal of International Money and Finance, Elsevier, vol. 104(C).
    3. Eller, Markus & Huber, Florian & Schuberth, Helene, 2020. "How important are global factors for understanding the dynamics of international capital flows?," Journal of International Money and Finance, Elsevier, vol. 109(C).

    More about this item

    Keywords

    WP; exchange rate; quantitative easing; Foreign Exchange Intervention; International Policy; FX intervention; demand shock; exchange rate depreciation; FX reserve; nominal exchange rate; QE policy; nominal interest rate; QE measure; QE stimulus; FX intervention policy; Bonds; Real exchange rates; Unconventional monetary policies; Exchange rates; Global;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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