Risk, Monetary Policy and the Exchange Rate

Gianluca Benigno, Pierpaolo Benigno and Salvatore Nisticò

No 17133, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this research, we provide new empirical evidence on the importance of time-varying uncertainty for the exchange rate and the excess return in currency markets. Following an increase in monetary policy uncertainty, the dollar exchange rate appreciates in the medium run, while an increase in the volatility of productivity leads to a dollar depreciation. We propose a general-equilibrium theory of exchange rate determination based on the interaction between monetary policy and time-varying uncertainty aimed at understanding these regularities. In the model, the behaviour of the exchange rate following nominal and real volatility shocks is consistent with the empirical evidence. Furthermore we show that risk factors and interest-rate smoothing are important in accounting for the negative coefficient in the UIP regression.

JEL-codes: E0 E43 E52 F3 F31 F41 (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Note: AP EFG IFM ME
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Citations: View citations in EconPapers (25)

Published as Gianluca Benigno & Pierpaolo Benigno & Salvatore Nistic�, 2012. "Risk, Monetary Policy, and the Exchange Rate," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 247 - 309.
Published as Risk, Monetary Policy and the Exchange Rate , Gianluca Benigno, Pierpaolo Benigno, Salvatore Nisticò. in NBER Macroeconomics Annual 2011, Volume 26 , Acemoglu and Woodford. 2012

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Journal Article: Risk, Monetary Policy, and the Exchange Rate (2012)
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