Monetary Policy and the Predictability of Nominal Exchange Rates

Martin Eichenbaum, Benjamin K. Johannsen and Sergio Rebelo ()
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Benjamin K. Johannsen: https://www.federalreserve.gov/econres/benjamin-k-johannsen.htm

No 2017-037, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper documents two facts about countries with floating exchange rates where monetary policy controls inflation using a short-term interest rate. First, the current real exchange rate predicts future changes in the nominal exchange rate at horizons greater than two years both in sample and out of sample. This predictability improves with the length of the horizon. Second, the real exchange rate is virtually uncorrelated with future inflation rates both in the short run and in the long run. We show that a large class of open-economy models is consistent with these findings and that, empirically and theoretically, the ability of the real exchange rate to forecast changes in the nominal exchange rate depends critically on the nature of the monetary regime.

Keywords: Exchange rates and foreign exchange; Monetary policy (search for similar items in EconPapers)
JEL-codes: E52 F31 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2017-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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https://www.federalreserve.gov/econres/feds/files/2017037r1pap.pdf Revision (application/pdf)
https://www.federalreserve.gov/econres/feds/files/2017037pap.pdf Original (application/pdf)

Related works:
Journal Article: Monetary Policy and the Predictability of Nominal Exchange Rates (2021)
Working Paper: Monetary Policy and the Predictability of Nominal Exchange Rates (2017)
Working Paper: Monetary Policy and the Predictability of Nominal Exchange Rates (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-37

DOI: 10.17016/FEDS.2017.037r1

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