 Exchange rate dynamics and the central bank's balance sheetGuillermo Gallacher, Camilo Granados and Janelle Mann Journal of International Money and Finance, 2024, vol. 148, issue C Abstract: Are nominal exchange rate variations linked to the central bank's balance sheet, in particular to remunerated domestic liabilities? We use two metrics of implied exchange rates based on central bank balance sheet data: one is a traditional metric that includes the monetary base, and the other adds remunerated domestic liabilities. We first estimate a VAR model to investigate the endogenous interactions between central bank balance sheet components for a set of seven Latin American countries for the 2006:01-2019:12 period. Then, we use a pairwise cointegration framework to compare these two metrics of implied exchange rate with the spot (observed) exchange rate. We find that the implied exchange rates and the spot exchange rate are cointegrated for most of the set of Latin American countries. We also find that for a subset of our sample, the spot exchange rate adjusts to the metric that adds remunerated domestic liabilities. We conclude that remunerated domestic liabilities matter for understanding exchange rate dynamics, and explore a simple theoretical setup to better understand the mechanism. Date: 2024 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:148:y:2024:i:c:s0261560624001438 DOI: 10.1016/j.jimonfin.2024.103156 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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