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Monetary policy's rising FX impact in the era of ultra-low rates

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  • Massimo Ferrari
  • Jonathan Kearns
  • Andreas Schrimpf

Abstract

We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.

Suggested Citation

  • Massimo Ferrari & Jonathan Kearns & Andreas Schrimpf, 2017. "Monetary policy's rising FX impact in the era of ultra-low rates," BIS Working Papers 626, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:626
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    More about this item

    Keywords

    Rates; Unconventional Monetary Policy; Forward Guidance; Event Study; High Frequency Data;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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