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Unconventional policies and exchange rate dynamics

Author

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  • Adler, Gustavo
  • Lama, Ruy
  • Medina, Juan Pablo

Abstract

We study exchange rate dynamics under cooperative and self-oriented policies in a two-country DSGE model with unconventional monetary and exchange rate policies. The cooperative solution features a large exchange rate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policy instruments. Self-oriented policies (Nash equilibrium), however, entail limited exchange rate movements and an aggressive use of unconventional policies in both countries. Our results suggest that sizable exchange rate depreciations are not always a symptom of “beggar-thy-neighbor” policies. They could also reflect a desirable process of external adjustment that improves global welfare.

Suggested Citation

  • Adler, Gustavo & Lama, Ruy & Medina, Juan Pablo, 2019. "Unconventional policies and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 95(C), pages 402-423.
    • Handle: RePEc:eee:jimfin:v:95:y:2019:i:c:p:402-423
    DOI: 10.1016/j.jimonfin.2018.03.014
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    Cited by:

    1. Funashima, Yoshito, 2020. "Money stock versus monetary base in time–frequency exchange rate determination," Journal of International Money and Finance, Elsevier, vol. 104(C).
    2. Eller, Markus & Huber, Florian & Schuberth, Helene, 2020. "How important are global factors for understanding the dynamics of international capital flows?," Journal of International Money and Finance, Elsevier, vol. 109(C).
    3. Gábor Dávid Kiss & Mercédesz Mészáros, 2020. "Gravity Among Central Bank Balance Sheets: Monetary Policy Spill-Over on FX Volatility," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 5(1), pages 33-57, June.

    More about this item

    Keywords

    Foreign exchange intervention; Quantitative easing; International policy coordination;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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