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Monetary Policy Shocks in a Tri-Polar Model of Foreign Exchange

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  • Martin Melecky

    (School of Economics, University of New South Wales)

Abstract

This paper investigates effects of third-currency monetary policy shocks on exchange rates. For this purpose we setup a structural VAR model containing the exchange rates of the three major currencies – the U.S. dollar, the euro and the Japanese yen – and short-term interest rates on the three currencies. In addition, we include the medium-term interest rates and price levels as control variables. Long-run restrictions in accord with tested hypotheses and the existing literature are used to identify the structural VAR. The impulse response analysis of the co- integrated VAR reveals that third-currency monetary policy shocks not only significantly impact on the considered exchange rates but their impacts are comparable to those of MP shocks associated with the quoted currencies in terms of their magnitude.

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File URL: http://128.118.178.162/eps/if/papers/0505/0505016.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0505016.

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Length: 25 pages
Date of creation: 31 May 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0505016

Note: Type of Document - pdf; pages: 25
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Web page: http://128.118.178.162

Related research

Keywords: Exchange Rates; Currency Substitution; Third-Currency Effects; SVAR;

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