Monetary Policy and the Predictability of Nominal Exchange Rates

Martin Eichenbaum, Benjamin K. Johannsen and Sergio Rebelo ()

No 23158, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about inflation-targeting countries. First, the current real exchange rate predicts future changes in the nominal exchange rate. Second, the real exchange rate is a poor predictor of future inflation rates. We estimate a medium-size DSGE open-economy model that accounts quantitatively for these facts as well as other empirical properties of real and nominal exchange rates. The key estimated shocks that accounts for the dynamics of exchange rates and their covariance with inflation are disturbances to the foreign demand for dollar-denominated bonds.

JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Date: 2017-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
Note: EFG IFM
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Citations: View citations in EconPapers (28)

Published as M S Eichenbaum & B K Johannsen & S T Rebelo, 2021. "Monetary Policy and the Predictability of Nominal Exchange Rates," The Review of Economic Studies, vol 88(1), pages 192-228.

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Related works:
Journal Article: Monetary Policy and the Predictability of Nominal Exchange Rates (2021)
Working Paper: Monetary Policy and the Predictability of Nominal Exchange Rates (2017)
Working Paper: Monetary Policy and the Predictability of Nominal Exchange Rates (2017)
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