Monetary Policy and the Predictability of Nominal Exchange Rates

Martin Eichenbaum, B K Johannsen and S T Rebelo

The Review of Economic Studies, 2021, vol. 88, issue 1, 192-228

Abstract: This article studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about inflation-targeting countries. First, the current real exchange rate predicts future changes in the nominal exchange rate. Second, the real exchange rate is a poor predictor of future inflation rates. We estimate a medium-size, open-economy DSGE model that accounts quantitatively for these facts as well as other empirical properties of real and nominal exchange rates. The key estimated shocks that drive the dynamics of exchange rates and their covariance with inflation are disturbances to the foreign demand for dollar-denominated bonds.

Keywords: Monetary policy; Nominal exchange rate predictability; E52; F31; F41 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdaa024 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Monetary Policy and the Predictability of Nominal Exchange Rates (2017)
Working Paper: Monetary Policy and the Predictability of Nominal Exchange Rates (2017)
Working Paper: Monetary Policy and the Predictability of Nominal Exchange Rates (2017)
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:oup:restud:v:88:y:2021:i:1:p:192-228.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().