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Inflation expectation, monetary policy credibility, and exchange rates

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  • Lee, Seojin
  • Kim, Young Min

Abstract

Based on the affine term structure model, we estimate the expected inflation and measure the credibility of monetary policy in order to examine exchange rate dynamics. We find that when the U.S. inflation is expected to be high or corresponding U.K. variable is expected to be low, we can forecast dollar appreciation in the subsequent period. Moreover, the lower the credibility in the U.S. is, the more the dollar appreciates, especially before the 2008 global financial crisis. These findings support the view that exchange rate is systematically affected by the monetary policy in terms of expectation.

Suggested Citation

  • Lee, Seojin & Kim, Young Min, 2019. "Inflation expectation, monetary policy credibility, and exchange rates," Finance Research Letters, Elsevier, vol. 31(C).
    • Handle: RePEc:eee:finlet:v:31:y:2019:i:c:s1544612318306184
    DOI: 10.1016/j.frl.2018.12.006
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Exchange rates; Uncovered interest rate parity; Expected inflation; Monetary policy credibility;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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