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Risk, Monetary Policy and the Exchange Rate

In: NBER Macroeconomics Annual 2011, Volume 26

Listed author(s):
  • Gianluca Benigno
  • Pierpaolo Benigno
  • Salvatore Nisticò

In this research, we provide new empirical evidence on the importance of time-varying uncertainty for the exchange rate and the excess return in currency markets. Following an increase in monetary policy uncertainty, the dollar exchange rate appreciates in the medium run, while an increase in the volatility of productivity leads to a dollar depreciation. We propose a general-equilibrium theory of exchange rate determination based on the interaction between monetary policy and time-varying uncertainty aimed at understanding these regularities. In the model, the behaviour of the exchange rate following nominal and real volatility shocks is consistent with the empirical evidence. Furthermore we show that risk factors and interest-rate smoothing are important in accounting for the negative coefficient in the UIP regression.

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This chapter was published in:
  • Daron Acemoglu & Michael Woodford, 2012. "NBER Macroeconomics Annual 2011, Volume 26," NBER Books, National Bureau of Economic Research, Inc, number acem11-1, June.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12420.
    Handle: RePEc:nbr:nberch:12420
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    National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

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    Web page: http://www.nber.org
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    23. Charles Engel, 2011. "The Real Exchange Rate, Real Interest Rates, and the Risk Premium," NBER Working Papers 17116, National Bureau of Economic Research, Inc.
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