Do central banks respond to exchange rate movements? A Markov-switching structural investigation of commodity exporters and importers

Ragna Alstadheim (), Hilde Bjørnland () and Junior Maih

Energy Economics, 2021, vol. 96, issue C

Abstract: We analyse whether central banks in small open commodity exporting and importing countries respond to exchange rate movements, taking into consideration that there may be structural changes in parameters and volatility. Using a Markov Switching Rational Expectations framework, we estimate the model for Australia, Canada, New Zealand, Norway, Sweden and the UK. We find that the size of policy responses, and the volatility of structural shocks, have not stayed constant over the estimation sample. Furthermore, monetary policy has responded strongly to the exchange rate for many commodity exporters, most notablyNorway. This has had a stabilizing effect on the exchange rate. In particular, although the terms of trade are highly volatile among commodity exporters, the exchange rate has about the same volatility across all importers and exporters in the recent period.

Keywords: Monetary policy; Exchange rates; Commodity exporters; Markov switching (search for similar items in EconPapers)
JEL-codes: C68 E52 Q4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Do Central Banks Respond to Exchange Rate Movements? A Markov-Switching Structural Investigation of Commodity Exporters and Importers (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:96:y:2021:i:c:s0140988321000438

DOI: 10.1016/j.eneco.2021.105138

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