IDEAS home Printed from https://ideas.repec.org/p/yon/wpaper/2025rwp-240.html

US Monetary Policy, Exchange Rates, and Delayed Portfolio Adjustments

Author

Listed:
  • Sangyup Choi

    (Yonsei University)

  • Jongho Park

    (Soongsil University)

  • Kwangyong Park

    (Sogang University)

Abstract

What accounts for cross-country heterogeneity in exchange rate responses to U.S. monetary policy shocks? Using high-frequency data around Federal Open Market Committe (FOMC) announcements, we document that countries with deeper financial markets-proxied by the size of foreign portfolio liabilities-experience larger currency depreciations following U.S. monetary tightening. This effect is particularly strong for forward guidance shocks relative to conventional interest rate surprises. To rationalize these findings, we extend the gradual portfolio adjustment model by introducing a forward-looking news shock and allowing portfolio adjustment costs to decline with financial market depth. The model replicates our empirical findings, offering a unified explanation for heterogeneous short-run exchange rate dynamics.

Suggested Citation

  • Sangyup Choi & Jongho Park & Kwangyong Park, 2025. "US Monetary Policy, Exchange Rates, and Delayed Portfolio Adjustments," Working papers 2025rwp-240, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2025rwp-240
    as

    Download full text from publisher

    File URL: http://121.254.254.220/repec/yon/wpaper/2025rwp-240.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Joshua Aizenman & Mahir Binici & Michael M. Hutchison, 2016. "The Transmission of Federal Reserve Tapering News to Emerging Financial Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 317-356, June.
    2. Aizenman, Joshua, 1983. "A theory of current account and exchange rate determinations," European Economic Review, Elsevier, vol. 23(3), pages 261-280, September.
    3. Chen, Qianying & Filardo, Andrew & He, Dong & Zhu, Feng, 2016. "Financial crisis, US unconventional monetary policy and international spillovers," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 62-81.
    4. repec:bla:intfin:v:4:y:2001:i:2:p:221-55 is not listed on IDEAS
    5. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    6. Kim, Soyoung, 2003. "Monetary policy, foreign exchange intervention, and the exchange rate in a unifying framework," Journal of International Economics, Elsevier, vol. 60(2), pages 355-386, August.
    7. Swanson, Eric T., 2021. "Measuring the effects of federal reserve forward guidance and asset purchases on financial markets," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 32-53.
    8. Ian Domowitz & Jack Glen & Ananth Madhavan, 2001. "Liquidity, Volatility and Equity Trading Costs Across Countries and Over Time," International Finance, Wiley Blackwell, vol. 4(2), pages 221-255.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Krassimira Naydenova, 2018. "Built-In Problems in the New European Regulations for the Bulgarian Capital Market," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 106-134.
    2. Jonathan Kearns & Andreas Schrimpf & Fan Dora Xia, 2023. "Explaining Monetary Spillovers: The Matrix Reloaded," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(6), pages 1535-1568, September.
    3. Irma Alonso & Pedro Serrano & Antoni Vaello-Sebastià, 2021. "The impact of heterogeneous unconventional monetary policies on the expectations of market crashes," Working Papers 2127, Banco de España.
    4. Chengxue Yao & Fan Jiang & Liang Guo, 2023. "Fixed investment or financial assets investment: Evidence from political uncertainty in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 427-450, March.
    5. Balcilar, Mehmet & Ozdemir, Zeynel Abidin & Ozdemir, Huseyin & Wohar, Mark E., 2020. "Fed’s unconventional monetary policy and risk spillover in the US financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 42-52.
    6. Aktas, Osman Ulas & Kryzanowski, Lawrence, 2014. "Market impacts of trades for stocks listed on the Borsa Istanbul," Emerging Markets Review, Elsevier, vol. 20(C), pages 152-175.
    7. Tom Pak Wing FongAuthor-Workplace-Name: Research Department, Hong Kong Monetary Authority & Ka Fai LiAuthor-Workplace-Name: Research Department, Hong Kong Monetary Authority & Angela Kin Wan Sze, 2016. "Measuring Spillovers between the US and Emerging Markets," Working Papers 082016, Hong Kong Institute for Monetary Research.
    8. Anaya, Pablo & Hachula, Michael & Offermanns, Christian J., 2017. "Spillovers of U.S. unconventional monetary policy to emerging markets: The role of capital flows," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 275-295.
    9. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2013, January-A.
    10. Rodrigo Barria & Gabor Pinter, 2023. "Mispricing in inflation markets," Bank of England working papers 1034, Bank of England.
    11. Hoek, Jasper & Kamin, Steve & Yoldas, Emre, 2022. "Are higher U.S. interest rates always bad news for emerging markets?," Journal of International Economics, Elsevier, vol. 137(C).
    12. Cipriani, Marco & Guarino, Antonio, 2008. "Transaction costs and informational cascades in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 581-592, December.
    13. Lepone, Andrew & Wong, Jin Boon, 2017. "Pseudo market-makers, market quality and the minimum tick size," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 88-100.
    14. Eijffinger, Sylvester & Malagon, Jonathan, 2018. "Financial spillovers of international monetary policy: Six hypotheses on the Latin American case, 2010-2016," CEPR Discussion Papers 12678, C.E.P.R. Discussion Papers.
    15. Marco Cipriani & Antonio Guarino, 2006. "Transaction Costs and Informational Cascades in Financial Markets: Theory and Experimental Evidence," WEF Working Papers 0008, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
    16. Miguel Sarmiento-Paipilla & Nathali Cardozo-Alvarado & Fredy Gamboa-Estrada & Javier G�mez-Pineda & Carlos Le�n-Rinc�n & Javier Migu�lez-M�rquez & Jair Ojeda-Joya, 2023. "Ciclo financiero global, flujos de capital y respuestas de política," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, issue 104, pages 1-55, March.
    17. Inoue, Tomoo & Okimoto, Tatsuyoshi, 2022. "International spillover effects of unconventional monetary policies of major central banks," International Review of Financial Analysis, Elsevier, vol. 79(C).
    18. Ferrari, Massimo & Kearns, Jonathan & Schrimpf, Andreas, 2021. "Monetary policy’s rising FX impact in the era of ultra-low rates," Journal of Banking & Finance, Elsevier, vol. 129(C).
    19. Dedola, Luca & Georgiadis, Georgios & Gräb, Johannes & Mehl, Arnaud, 2021. "Does a big bazooka matter? Quantitative easing policies and exchange rates," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 489-506.
    20. Antonia Lopez Villavicencio & Marc Pourroy, 2023. "Information Shocks in the U.S. and Asset Mispricing in Emerging Economies," Working Papers hal-04159830, HAL.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:yon:wpaper:2025rwp-240. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: YERI (email available below). General contact details of provider: https://edirc.repec.org/data/eryonkr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.