Money stock versus monetary base in time–frequency exchange rate determination

This study uses a time–frequency analysis to provide empirical evidence of the changing role of the money supply in the determination of the Japanese yen/U.S. dollar exchange rate. We demonstrate that in the short run, money supply has a stable significant effect on the exchange rate only after the introduction of quantitative easing policies, together with a remarkable difference between the money stock and the monetary base. Under quantitative easing policies, while money stock has a limited role, at best, in short-run exchange rate dynamics, increases in the monetary base cause the currency to depreciate in the short run. The notable role of the monetary base remains exceptionally stable over time only in quantitative easing regimes, while the exchange rate is unstably connected to other fundamentals. Moreover, in the long run, the monetary base outperforms the money stock in explaining the exchange rate, in general. Lastly, the growing role of the monetary base is shown to be robust to several checks.