Monetary Policy and the Real Exchange Rate: Some Evidence
AbstractThis paper examines the effects on real exchange rates of exogenous money supply shocks. Such shocks are conventionally associated with monetary policy, although they may also arise from shifts in the desired reserve to deposit ratio of the banking system or in the public's desired currency to deposit ratio. They necessarily involve nominal exchange rate movements and, given price rigidity, real exchange rate movements as well. No evidence is found that unanticipated money shocks affected real exchange rates in nine major industrial countries during the flexible exchange rate period that began with the collapse of the Bretton Woods system. Real shocks related to technological change, real income cycles, commodity market developments and, quite possibly, government fiscal policies explain virtually all the variability of real exchange rates. An extensive search also finds no evidence that real exchange rates were affected by anticipated money shocks. Since all sensible theories of real exchange rate behavior hold that exogenous unanticipated money shocks will necessarily affect real exchange rates, we are left with the conclusion that observed high-frequency monetary shocks are endogenously determined responses of the authorities to stochastic shocks to the demand for nominal money holdings associated with interest rate and exchange rate speculation and other factors. The evidence suggests that the authorities did a sufficiently good, though imperfect, job of smoothing financial markets to render the relationship between the real exchange rate and observed stochastic unanticipated money supply shocks statistically insignificant after other factors are taken into account.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Toronto, Department of Economics in its series Working Papers with number floyd-98-02.
Length: 35 pages
Date of creation: 29 Jan 1998
Date of revision:
Contact details of provider:
Postal: 150 St. George Street, Toronto, Ontario
Phone: (416) 978-5283
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- F1 - International Economics - - Trade
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stockman, Alan C, 1980.
"A Theory of Exchange Rate Determination,"
Journal of Political Economy,
University of Chicago Press, vol. 88(4), pages 673-98, August.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
- Dornbusch, Rudiger, 1976.
" The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 78(2), pages 255-75.
- R. Dornbusch, 1975. "The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Working papers 165, Massachusetts Institute of Technology (MIT), Department of Economics.
- Stockman, Alan C. & Svensson, Lars E. O., 1987.
"Capital flows, investment, and exchange rates,"
Journal of Monetary Economics,
Elsevier, vol. 19(2), pages 171-201, March.
- Meese, R. & Rogoff, K., 1988.
"Was It Real? The Exchange Rate-Interest Differential Ralation Over The Modern Floating-Rate Period,"
368, Wisconsin Madison - Social Systems.
- Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-48, September.
- Gordon, David B & Leeper, Eric M, 1994.
"The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification,"
Journal of Political Economy,
University of Chicago Press, vol. 102(6), pages 1228-47, December.
- David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 92-13, Federal Reserve Bank of Atlanta.
- David B. Gordon & Eric M. Leeper, 1993. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 93-5, Federal Reserve Bank of Atlanta.
- Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
- David O. Cushman & Tao Zha, 1995.
"Identifying monetary policy in a small open economy under flexible exchange rates,"
95-7, Federal Reserve Bank of Atlanta.
- Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
- Martin Eichenbaum & Charles Evans, 1992.
"Some empirical evidence on the effects of monetary policy shocks on exchange rates,"
Working Paper Series, Macroeconomic Issues
92-32, Federal Reserve Bank of Chicago.
- Martin Eichenbaum & Charles L. Evans, 1993. "Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates," NBER Working Papers 4271, National Bureau of Economic Research, Inc.
- Helpman, Elhanan, 1981.
"An Exploration in the Theory of Exchange-Rate Regimes,"
3445091, Harvard University Department of Economics.
- Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October.
- Helpman, Elhanan & Razin, Assaf, 1982.
"Dynamics of a Floating Exchange Rate Regime,"
3445095, Harvard University Department of Economics.
- Thomas J. Sargent, 1975.
"The observational equivalence of natural and unnatural rate theories of macroeconomics,"
48, Federal Reserve Bank of Minneapolis.
- Sargent, Thomas J, 1976. "The Observational Equivalence of Natural and Unnatural Rate Theories of Macroeconomics," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 631-40, June.
- Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
- Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
- Sims, Christopher A., 1992.
"Interpreting the macroeconomic time series facts : The effects of monetary policy,"
European Economic Review,
Elsevier, vol. 36(5), pages 975-1000, June.
- Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
- Irving B. Kravis & Robert E. Lipsey, 1982. "Towards an Explanation of National Price Levels," NBER Working Papers 1034, National Bureau of Economic Research, Inc.
- John E. Floyd, 1998. "Stochastic Monetary Interdependence, Currency Regime Choice and the Operation of Monetary Policy," Working Papers floyd-98-01, University of Toronto, Department of Economics.
- John E. Floyd, 1995. "Are Canadian Interest Rates Too High?," Canadian Public Policy, University of Toronto Press, vol. 21(2), pages 143-158, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePEc Maintainer).
If references are entirely missing, you can add them using this form.