If exchange rates are random walks, then almost everything we say about monetary policy is wrong
Andrew Atkeson and
Patrick Kehoe ()
No 388, Staff Report from Federal Reserve Bank of Minneapolis
The key question asked by standard monetary models used for policy analysis, How do changes in short-term interest rates affect the economy? All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates. We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and nearly no changes in conditional means. In this sense standard monetary models capture essentially none of what is going on in the data. We thus argue that almost everything we say about monetary policy using these models is wrong.> Replaces Working Paper No. 650
Keywords: Monetary policy; Foreign exchange (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=1086 [301 Moved Permanently]--> https://www.minneapolisfed.org/research/common/pub_detail.cfm?pb_autonum_id=1086)
Journal Article: If exchange rates are random walks, then almost everything we say about monetary policy is wrong (2008)
Journal Article: If Exchange Rates are Random Walks, Then Almost Everything We Say About Monetary Policy is Wrong (2007)
Working Paper: If exchange rates are random walks then almost everything we say about monetary policy is wrong (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:388
Access Statistics for this paper
More papers in Staff Report from Federal Reserve Bank of Minneapolis Contact information at EDIRC.
Bibliographic data for series maintained by ().