Does the Exchange Rate Depend upon Relative Monetary Policies?

Fotios M. Siokis ()
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Fotios M. Siokis: Alpha Bank, Economic Research Division, Postal: 40 Stadiou St. GR-102 52 Athens, Greece, http://www.alpha.gr/

Economia Internazionale / International Economics, 2002, vol. 55, issue 1, 55-68

Abstract: In this paper we consider the evidence of liquidity effects on the exchange rate. We consider VAR systems for the U.S. and Euro-area and found that while innovations in US. monetary poiicy lead to the expected depreciation (appreciation) of the U.S. dollar, positive innovations to the Euro-area interest rates associated with an impact depreciation of the Euro. We offered an explanation for this ‘exchange rate puzzie”. The innovation in the Euro-area occurs as an endogenous policy reaction to underlying inflationary shocks, which causes the Euro depreciation. After controlling for expected inflation, the interest rates innovation leads to a persistent currency appreciation.

Keywords: Liquidity effects; transmission mechanism; VAR (search for similar items in EconPapers)
JEL-codes: E52 F41 (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ecoint:0198

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