Unconventional Policies and Exchange Rate Dynamics

Gustavo Adler, Ruy Lama and Juan Medina

No 2017/237, IMF Working Papers from International Monetary Fund

Abstract: We study exchange rate dynamics under cooperative and self-oriented policies in a two-country DSGE model with unconventional monetary and exchange rate policies. The cooperative solution features a large exchange rate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policy instruments. Self-oriented policies (Nash equilibrium), however, entail limited exchange rate movements and an aggressive use of unconventional policies in both countries. Our results highlight the role of international policy cooperation in allowing the exchange rate to play the traditional role of shock absorber.

Keywords: WP; exchange rate; quantitative easing; Foreign Exchange Intervention; International Policy; FX intervention; demand shock; exchange rate depreciation; FX reserve; nominal exchange rate; QE policy; nominal interest rate; QE measure; QE stimulus; FX intervention policy; Bonds; Real exchange rates; Unconventional monetary policies; Exchange rates; Global (search for similar items in EconPapers)
Pages: 38
Date: 2017-11-13
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Journal Article: Unconventional policies and exchange rate dynamics (2019)
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