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Intervening against the Fed

Author

Listed:
  • Rodnyansky, A.
  • Timmer, Y.
  • Yago, N.

Abstract

This paper studies the spillovers of US monetary policy and the mitigating role of foreign exchange interventions (FXI) by combining deviations from a daily FXI policy rule with high frequency US monetary policy shocks, daily exchange rates, and firm-level stock prices, as well as firm-level balance sheet variables across multiple countries. We first present evidence that without interventions contractionary US monetary policy shocks spill over through a balance sheet channel: foreign exchange rates depreciate and stock prices fall, driven by those firms with US dollar debt. However, when countries counter-intervene, the spillover of US monetary policy tightening is muted. FXIs entirely offset the depreciation of the domestic exchange rate and the reduction in stock price for firms with US dollar debt, suggesting that "intervening against the Fed" protects economies from the adverse spillover of US monetary policy tightening through the balance sheet channel of exchange rates.

Suggested Citation

  • Rodnyansky, A. & Timmer, Y. & Yago, N., 2023. "Intervening against the Fed," Cambridge Working Papers in Economics 2357, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2357
    Note: ar908, ny270
    as

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    File URL: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2357.pdf
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    More about this item

    Keywords

    Foreign Exchange Intervention; Monetary Policy Spillovers; Balance Sheet Channel; Exchange Rates; Dollar Debt;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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