Exchange Rates and the Information Channel of Monetary Policy

Oliver Holtemöller, Alexander Kriwoluzky and Boreum Kwak

No 1906, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We disentangle the effects of monetary policy announcements on real economic variables into an interest rate shock component and a central bank information shock component. We identify both components using changes in interest rate futures and in exchange rates around monetary policy announcements. While the volatility of interest rate surprises declines around the Great Recession, the volatility of exchange rate changes increases. Making use of this heteroskedasticity, we estimate that a contractionary interest rate shock appreciates the dollar, increases the excess bond premium, and leads to a decline in prices and output, while a positive information shock appreciates the dollar, decreases prices and the excess bond premium, and increases output.

Keywords: Monetary policy; central bank information shock; identification through heteroskedasticity; high-frequency identification; proxy SVAR (search for similar items in EconPapers)
JEL-codes: C36 E52 E58 (search for similar items in EconPapers)
Pages: 25 p.
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp1906

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