US Monetary Policy, Exchange Rates, and Delayed Portfolio Adjustments

Sangyup Choi, Jongho Park and Kwangyong Park

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: What accounts for cross-country heterogeneity in exchange-rate responses to U.S. monetary policy shocks? Using daily data around Federal Open Market Committee (FOMC) announcements for 34 countries from 2001 to 2019, we show that countries with deeper financial markets experience larger currency depreciations following contractionary U.S. monetary policy shocks. This amplification is concentrated in forward-guidance shocks rather than contemporaneous target-rate surprises. The result is robust to alternative measures of financial market depth and to controls for domestic monetary policy responses, broad dollar movements, and various country characteristics. The amplification fades within approximately one month, suggesting that financial market depth matters primarily for high-frequency exchange-rate adjustment. A parsimonious portfolio-adjustment model interprets these empirical patterns by linking market depth to lower rebalancing costs and by treating forward guidance as news about future interest-rate differentials.

Keywords: exchange rates; U.S. monetary policy; portfolio adjustment frictions; forward guidance; event study (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 G11 G17 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2026-06
New Economics Papers: this item is included in nep-ifn and nep-mon
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Working Paper: US Monetary Policy, Exchange Rates, and Delayed Portfolio Adjustments (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2026-43

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