How does monetary policy respond to exchange rate movements? New international evidence

Hilde C. Bjørnland () and Jørn Halvorsen ()
Authors registered in the RePEc Author Service: Hilde Christiane Bjørnland ()

No No 1/2010, Working Papers from Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School

Abstract: This paper analyzes how monetary policy has responded to exchange rate movements in six open economies, paying particular attention to the two-way interaction between monetary policy and the exchange rate. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Our suggested identification scheme allows for a simultaneous reaction between the interest rates and the exchange rate. Doing so we find that, while there is a instantaneous reaction in the exchange rate following a monetary policy shock in all countries, monetary policy responds on impact to an exchange rate shock in only four of the six countries. While this suggests that the exchange rate is not equally important in the interest rate setting in all countries, we find that accounting for a potential interaction is still crucial when identifying monetary policy shocks in open economies structural VARs.

Keywords: Exchange rate; monetary policy; SVAR; Bayesian estimation; sign restrictions. (search for similar items in EconPapers)
JEL-codes: C32 E52 F31 F41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2010-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Related works:
Journal Article: How does Monetary Policy Respond to Exchange Rate Movements? New International Evidence (2014)
Working Paper: How does monetary policy respond to exchange rate movements? New international evidence (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:bny:wpaper:0001

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