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How does Monetary Policy Respond to Exchange Rate Movements? New International Evidence

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  • Hilde C. Bjørnland
  • Jørn I. Halvorsen

Abstract

type="main" xml:lang="en"> This article analyzes how monetary policy has responded to exchange rate movements in six open economies, paying particular attention to the two-way interaction between monetary policy and the exchange rate. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Doing so we find that, while there is a instantaneous reaction in the exchange rate following a monetary policy shock in all countries, monetary policy responds significantly on impact to an exchange rate shock in only four of the six countries.

Suggested Citation

  • Hilde C. Bjørnland & Jørn I. Halvorsen, 2014. "How does Monetary Policy Respond to Exchange Rate Movements? New International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(2), pages 208-232, April.
    • Handle: RePEc:bla:obuest:v:76:y:2014:i:2:p:208-232
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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