Unconventional Monetary Policy and International Risk Premia

John Rogers, Chiara Scotti and Jonathan Wright

No 1172, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We assess the relationship between monetary policy, foreign exchange risk premia and term premia at the zero lower bound. We estimate a structural VAR including U.S. and foreign interest rates and exchange rates, and identify monetary policy shocks through a method that uses these surprises as the crucial \"external instrument\" that achieves identification without having to use implausible short-run restrictions. This allows us to measure effects of policy shocks on expectations, and hence risk premia. U.S. monetary policy easing shocks lower domestic and foreign bond risk premia, lead to dollar depreciation and lower foreign exchange risk premia. We present some evidence that U.S. monetary policy easing surprises at the ZLB shift options-implied skewness in the direction of dollar depreciation and also reduce the demand for the liquidity of short-term U.S. Treasuries. Both of these channels should lower foreign exchange risk premia.

Pages: 30 pages
Date: 2016-05-31
New Economics Papers: this item is included in nep-cba, nep-ger, nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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Journal Article: Unconventional Monetary Policy and International Risk Premia (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1172

DOI: 10.17016/IFDP.2016.1172

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