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

Hilde Bjørnland () and Jørn Halvorsen ()

No 2008/15, Working Paper from Norges Bank

Abstract: 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.

Keywords: Exchange rate; monetary policy; SVAR; Bayesian estimation; sign restrictions (search for similar items in EconPapers)
JEL-codes: C32 E52 F31 F41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2008-10-22
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (16)

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https://www.norges-bank.no/en/news-events/news-pub ... pers/2008/WP-200815/

Related works:
Journal Article: How does Monetary Policy Respond to Exchange Rate Movements? New International Evidence (2014)
Working Paper: How does monetary policy respond to exchange rate movements? New international evidence (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2008_15

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