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Effects of monetary policy on the exchange rates: A Time-varying analysis

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  • Yang, Yang
  • Zhang, Jiqiang

Abstract

Employing a time-varying parameter vector autoregression (VAR) model, which is identified by high frequency monetary policy surprises, we examine the effects of monetary policy on the exchange rates. Our results indicate that a contractionary monetary policy shock leads to an appreciation of the exchange rate during both conventional and unconventional monetary policy periods in the US. During the period 2008–2012, when unconventional monetary policy was practiced, monetary policy shocks produced greater negative effects on the exchange rate compared with other periods. We find that the maximal appreciation of the exchange rate occurs within 3–4 months during most of the period, providing favorable evidence to support Dornbusch’s (1976) overshooting hypothesis.

Suggested Citation

  • Yang, Yang & Zhang, Jiqiang, 2021. "Effects of monetary policy on the exchange rates: A Time-varying analysis," Finance Research Letters, Elsevier, vol. 43(C).
    • Handle: RePEc:eee:finlet:v:43:y:2021:i:c:s1544612321001951
    DOI: 10.1016/j.frl.2021.102114
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    More about this item

    Keywords

    Time-varying parameter VAR; Monetary policy; Exchange rate; High frequency identification;
    All these keywords.

    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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