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Monetary Policy and Exchange Rate Dynamics: New Evidence from the Narrative Approach to Shock Identification

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Author Info
John C. Bluedorn () (Nuffield College, Oxford University)
Christopher Bowdler () (Nuffield College, Oxford University)

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Abstract

We argue that endogenous and anticipated movements in interest rates lead to underestimates of the speed and magnitude of the exchange rate response to monetary policy. Employing the Romer and Romer (2004) exogenous monetary policy shock measure, we find that the effect of a one percentage point increase in the U.S. interest rate is up to twice as large and 3 times as fast as that obtained using the actual federal funds rate to identify monetary shocks. Moreover, new evidence from open economy VARs emphasises the adjustment role of the exchange rate. U.S. prices and output respond almost twice as quickly as they do in a closed economy VAR using the Romer and Romber shock measure. There is also evidence of stronger international transmission of U.S. monetary shocks. Overall, the estimated response speeds and magnitudes are more easily reconciled with existing models than previous empirical work.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2005/w18/RRFX.03.08.2005.pdf
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Publisher Info
Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W18.

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Length: 59 pages
Date of creation: 01 Aug 2005
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Handle: RePEc:nuf:econwp:0518

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Web page: http://www.nuff.ox.ac.uk/economics/

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Related research
Keywords: monetary policy shocks exchange rate dynamics open economy VARs

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Find related papers by 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
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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