Examining the relationship between unconventional monetary policy and exchange rate movements: Empirical evidence from United States quantitative easing

This study employs Autoregressive Integrated Moving Average (ARIMA) and Autoregressive Conditional Heteroskedasctic (ARCH) models to examine the impact of the unconventional monetary policies implemented in the United States upon the exchange rate movement and volatility in the emerging and growth‐leading economies (EAGLEs), which include Brazil, India, Indonesia, Mexico, Philippines and Turkey. Two series of exchange rates, namely average exchange rate (AER) and end‐of‐period exchange rate (EER), are used with different sets of sample, EER covers 1990:01 to 2018:04 and AER spans over 1980:01 to 2018:04 period. The variance series of the ARCH model is used to measure the volatility of AER and EER. The best ARIMA model is estimated for AER and EER for each country, and the ARIMA model serves as the mean equation for the ARCH volatility measure. Unlike the previous studies, this paper focuses on the EAGLEs, employs exchange rate, and considers various ARCH alternatives in choosing the best model. The findings of the study reveal that India is the only country among the EAGLEs whose exchange rate movement is affected by the U.S. unconventional monetary policy. Another important point is the negative effect of QE policies on the volatility of both AER and EER across the EAGLEs countries. The implication is that QE policies tend to reduce the uncertainty in the foreign exchange of the EAGLEs countries. Hence the policy makers in the EAGLEs countries do not need to take any action whenever the United States pursues unconventional monetary policy.