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Exchange rates and monetary policy

Author

Listed:
  • Stavrakeva, Vania

    () (London Business School)

  • Tang, Jenny

    () (Federal Reserve Bank of Boston)

Abstract

In this paper we confront the data with the financial-market folk wisdom that monetary policy is one of the key drivers of nominal exchange rates. Focusing on measures of conventional and unconventional monetary policy, we find that monetary policy surprises and changes in expectations about future monetary policy can explain a sizable fraction of the variation in exchange rate changes for certain currency pairs. However, our results show that expected excess returns account for most of this variation. We also find that the importance unconventional monetary policy plays for explaining exchange rate changes is larger in the period since the United States hit the zero lower bound in December 2008. In contrast, the importance of conventional monetary policy is lower during this period due to a decrease in the volatility of monetary policy surprises. Meanwhile, the marginal response of exchange rate changes relative to conventional policy surprises actually has strengthened due to a change in the relationship between these surprises and expected excess returns.

Suggested Citation

  • Stavrakeva, Vania & Tang, Jenny, 2015. "Exchange rates and monetary policy," Working Papers 15-16, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:15-16
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    References listed on IDEAS

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    Cited by:

    1. repec:bla:jfinan:v:72:y:2017:i:3:p:1213-1252 is not listed on IDEAS
    2. 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.
    3. Philippe Mueller & Alireza Tahbaz-Salehi & Andrea Vedolin, 2017. "Exchange Rates and Monetary Policy Uncertainty," Journal of Finance, American Finance Association, vol. 72(3), pages 1213-1252, June.
    4. Gräb, Johannes & Kostka, Thomas, 2018. "Predicting risk premia in short-term interest rates and exchange rates," Working Paper Series 2131, European Central Bank.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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