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Monetary policy and the exchange rate: Evidence from a two-country model

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  • Voss, G.M.
  • Willard, L.B.

Abstract

We present a two-country structural VAR model of monetary policy and the exchange rate for the US and Australia that allows us to identify both US and Australian monetary policy innovations. A key finding is the asymmetry in the effects of these innovations on the exchange rate, both the nature of the response and their relative importance. A second key finding is evidence of exchange rate disconnect: innovations to the real economy explain little of the variation in the exchange rate. We also consider the effects of exchange rate innovations and find evidence of slow but substantial pass through to domestic prices with evidence that the response of monetary policy is at least partially responsible for the slow adjustment.

Suggested Citation

  • Voss, G.M. & Willard, L.B., 2009. "Monetary policy and the exchange rate: Evidence from a two-country model," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 708-720, December.
  • Handle: RePEc:eee:jmacro:v:31:y:2009:i:4:p:708-720
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    References listed on IDEAS

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    Cited by:

    1. Jiang, Jiadan & Kim, David, 2013. "Exchange rate pass-through to inflation in China," Economic Modelling, Elsevier, vol. 33(C), pages 900-912.
    2. Georgios Georgiadis, 2016. "To bi, or not to bi? Differences in Spillover Estimates from Bilateral and Multilateral Multi-country Models," EcoMod2016 9145, EcoMod.
    3. Tomas Havranek & Marek Rusnak, 2013. "Transmission Lags of Monetary Policy: A Meta-Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 39-76, December.
    4. Georgiadis, Georgios & Jancokova, Martina, 2017. "Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from 1001 Shocks," Globalization and Monetary Policy Institute Working Paper 314, Federal Reserve Bank of Dallas.
    5. Mardi Dungey & Denise Osborn & Mala Raghavan, 2014. "International Transmissions to Australia: The Roles of the USA and Euro Area," The Economic Record, The Economic Society of Australia, vol. 90(291), pages 421-446, December.
    6. Kang-Soek Lee & Philippe Saucier, 2011. "Should the UK Join the Euro Zone? Evidence from a Synthetic OCA Assessment," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 8(1), pages 77-96, June.
    7. Moosa, Imad & Burns, Kelly, 2014. "The unbeatable random walk in exchange rate forecasting: Reality or myth?," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 69-81.
    8. Manalo, Josef & Perera, Dilhan & Rees, Daniel M., 2015. "Exchange rate movements and the Australian economy," Economic Modelling, Elsevier, vol. 47(C), pages 53-62.
    9. Heinlein, Reinhold & Krolzig, Hans-Martin, 2012. "On the construction of two-country cointegrated VAR models with an application to the UK and US," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62310, Verein für Socialpolitik / German Economic Association.
    10. Kang-Soek LEE, 2010. "A Euro Peg System as an Alternative for the Chinese Exchange Rate Regime," LEO Working Papers / DR LEO 165, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    11. Georgiadis, Georgios, 2015. "To bi, or not to bi? Differences in spillover estimates from bilateral and multilateral multi-country models," Working Paper Series 1868, European Central Bank.
    12. Bahmani-Oskooee, Mohsen & Chang, Tsangyao & Ranjbar, Omid, 2016. "Asymmetric causality using frequency domain and time-frequency domain (wavelet) approaches," Economic Modelling, Elsevier, vol. 56(C), pages 66-78.
    13. repec:eee:inecon:v:107:y:2017:i:c:p:1-18 is not listed on IDEAS
    14. Kang-Soek Lee, 2011. "A Euro Peg System as an Alternative for the Chinese Exchange Rate Regime?," Chapters,in: The Economic Crisis and European Integration, chapter 8 Edward Elgar Publishing.

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