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How does monetary policy respond to exchange rate movements? New international evidence

  • Hilde C. Bjørnland

    ()

    (Department of Economics, Norwegian School of Management (BI))

  • Jørn I. Halvorsen

    (Norwegian School of Economics and Business Administration)

This paper analyzes how monetary policy responds to exchange rate movements in open economies, paying particular attention to the two-way interaction between monetary policy and exchange rate movements. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Our suggested identification scheme allows for a imultaneous reaction between the variables that are observed to respond intraday to news (the interest rate and the exchange rate), but maintains the recursive order for the traditional macroeconomic variables (GDP and inflation). Doing so, we find strong interaction between monetary policy and exchange rate variation. Our results suggest more theory consistency in the monetary policy responses than what has previously been reported in the literature.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2008/WP-200815/
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Paper provided by Norges Bank in its series Working Paper with number 2008/15.

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Length: 45 pages
Date of creation: 22 Oct 2008
Date of revision:
Handle: RePEc:bno:worpap:2008_15
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  1. Wei Dong, 2008. "Do Central Banks Respond to Exchange Rate Movements? Some New Evidence from Structural Estimation," Working Papers 08-24, Bank of Canada.
  2. Ibrahim Chowdhury & Mathias Hoffmann & Andreas Schabert, . "Inflation Dynamics and the Cost Channel of Monetary Transmission," Working Papers 2003_19, Business School - Economics, University of Glasgow, revised Oct 2003.
  3. Farrant, Katie & Peersman, Gert, 2006. "Is the Exchange Rate a Shock Absorber or a Source of Shocks? New Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 939-961, June.
  4. Almuth Scholl & Harald Uhlig, 2005. "New Evidence on the Puzzles. Results from Agnostic Identification on Monetary Policy and Exchange Rates," SFB 649 Discussion Papers SFB649DP2005-037, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, June.
  6. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  7. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
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