 Permanent and temporary monetary policy shocks and the dynamics of exchange ratesAlexandre Carvalho, João Valle e Azevedo and Pedro Pires Ribeiro Journal of International Economics, 2024, vol. 147, issue C Abstract: We show the distinction between permanent and temporary monetary policy shocks is helpful to understand the impacts of monetary policy on exchange rates in the short as well as over the long run. Drawing on monthly data for several advanced economies from 1971 to 2019 and resorting to a simple structural vector error correction (SVEC) model, we find that a shock leading to a temporary increase in U.S. nominal interest rates leads to a temporary appreciation of the USD against the other currencies. In turn, a monetary policy shock leading to a permanent rise in nominal interest rates – e.g., one associated with a normalisation of monetary policy after a long period at the zero lower bound – results in a depreciation of the USD, in the short as well as over the long run that may contribute to higher (not lower) inflation also in the short run. Keywords: Exchange rates; Fisher relation; Monetary policy cointegration; Monetary shocks; Structural VEC models (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:147:y:2024:i:c:s0022199623001575 DOI: 10.1016/j.jinteco.2023.103871 Access Statistics for this article Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, Andrés More articles in Journal of International Economics from Elsevier |
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