Exchange Rates and Monetary Policy Uncertainty

Andrea Vedolin, Alireza Tahbaz-Salehi and Philippe Mueller ()
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Andrea Vedolin: London School of Economics

No 138, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-a`-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

Date: 2016
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Exchange Rates and Monetary Policy Uncertainty (2017)
Working Paper: Exchange rates and monetary policy uncertainty (2017)
Working Paper: Exchange rates and monetary policy uncertainty (2016)
Working Paper: Exchange rates and monetary policy uncertainty (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:138

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