The effects of conventional and unconventional monetary policy on exchange rates

Atsushi Inoue and Barbara Rossi

Journal of International Economics, 2019, vol. 118, issue C, 419-447

Abstract: What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy periods in the US by using a novel identification procedure that defines monetary policy shocks as changes in the whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substantial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents' expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks.

Keywords: Exchange rates; Zero-lower bound; Unconventional monetary policy; Forward guidance. (search for similar items in EconPapers)
JEL-codes: C22 C53 F31 F37 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (75)

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Related works:
Working Paper: The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates (2019)
Chapter: The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates (2018)
Working Paper: The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates (2018)
Working Paper: The effects of conventional and unconventional monetary policy on exchange rates (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:118:y:2019:i:c:p:419-447

DOI: 10.1016/j.jinteco.2019.01.015

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