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The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates

Atsushi Inoue () and Barbara Rossi ()

No 1078, Working Papers from Barcelona Graduate School of Economics

Abstract: What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy shocks as changes int he whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substancial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents'expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks.

Keywords: exchange rates; zero-lower bound; unconventional monetary policy; forward guidance (search for similar items in EconPapers)
JEL-codes: F31 F37 C22 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
Date: 2018-10
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Related works:
Journal Article: The effects of conventional and unconventional monetary policy on exchange rates (2019) Downloads
Chapter: The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates (2018)
Working Paper: The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates (2018) Downloads
Working Paper: The effects of conventional and unconventional monetary policy on exchange rates (2018) Downloads
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