The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates

Atsushi Inoue and Barbara Rossi

No 25021, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy periods in the US by using a novel identification procedure that defines monetary policy shocks as changes in the whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substantial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents' expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis.

JEL-codes: C22 C53 F31 F37 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published as The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates , Atsushi Inoue, Barbara Rossi. in NBER International Seminar on Macroeconomics 2018 , Galí and West. 2019
Published as Atsushi Inoue & Barbara Rossi, 2019. "The effects of conventional and unconventional monetary policy on exchange rates," Journal of International Economics, .

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Related works:
Journal Article: The effects of conventional and unconventional monetary policy on exchange rates (2019)
Working Paper: The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates (2019)
Chapter: The Effects of Conventional and Unconventional Monetary Policy on Exchange Rates (2018)
Working Paper: The effects of conventional and unconventional monetary policy on exchange rates (2018)
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