Monetary policy surprises and exchange rate behavior

Refet Gürkaynak, Hakan Kara, Burçin Kısacıkoğlu and Sang Seok Lee

Journal of International Economics, 2021, vol. 130, issue C

Abstract: Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy, may explain the abnormality. It turns out that many informational assumptions make a standard two-country New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event study and model implications for these. We find that there is heterogeneity in this dimension in the event study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event study analysis with model-based mechanisms of asset pricing.

Keywords: Central bank information effect; Exchange rate response to monetary policy; Open economy macro-finance modeling (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Chapter: Monetary Policy Surprises and Exchange Rate Behavior (2020)
Working Paper: Monetary Policy Surprises and Exchange Rate Behavior (2020)
Working Paper: Monetary Policy Surprises and Exchange Rate Behavior (2020)
Working Paper: Monetary Policy Surprises and Exchange Rate Behavior (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:130:y:2021:i:c:s0022199621000209

DOI: 10.1016/j.jinteco.2021.103443

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