If exchange rates are random walks, then almost everything we say about monetary policy is wrong

Fernando Alvarez, Andrew Atkeson and Patrick Kehoe

Quarterly Review, 2008, issue Jul, No v. 32, No. 1, 2-9

Abstract: The key question asked by standard monetary models used for policy analysis is, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and nearly no changes in conditional means. In this sense, standard monetary models capture essentially none of what is going on in the data. We thus argue that almost everything we say about monetary policy using these models is wrong.

Keywords: Monetary policy; Random walks (Mathematics); Foreign exchange (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.minneapolisfed.org/research/qr/qr3211.pdf Full Text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Internal Server Error (https://www.minneapolisfed.org/research/qr/qr3211.pdf [301 Moved Permanently]--> https://researchdatabase.minneapolisfed.org/downloads/n870zq99r)

Related works:
Journal Article: If Exchange Rates are Random Walks, Then Almost Everything We Say About Monetary Policy is Wrong (2007)
Working Paper: If exchange rates are random walks, then almost everything we say about monetary policy is wrong (2007)
Working Paper: If exchange rates are random walks then almost everything we say about monetary policy is wrong (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmqr:y:2008:i:jul:p:2-9:n:v.32no.1

Access Statistics for this article

More articles in Quarterly Review from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by Kate Hansel ().