IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_3162.html
   My bibliography  Save this paper

On the Effects of Monetary Policy Shocks on Exchange Rates

Author

Listed:
  • Michael Binder
  • Qianying Chen
  • Xuan Zhang

Abstract

In this paper we re-consider the effects of monetary policy shocks on exchange rates and forward premia. In the recent empirical literature, these effects have been predominantly described as puzzling, in that they would include delayed overshooting of the exchange rate as well as persistent deviations from uncovered interest parity. We specify an empirical model that in particular (i) allows for simultaneous multi-country adjustments in response to monetary policy shocks, and (ii) takes advantage of the identifying restrictions for monetary policy shocks implied by empirically supported long-run relations between the macroeconomic variables under consideration. Using monthly data from 1978 to 2006 for a panel of nine industrial economies (Australia, Canada, France, Germany, Italy, Japan, New Zealand, United Kingdom, and the United States), we find that U.S. Dollar effective and bilateral real exchange rates appreciate on impact after a contractionary U.S. monetary policy shock, and that there is no delay in the overshooting of the U.S. Dollar. Furthermore, there is no persistent significant forward premium. These results are consistent with the real exchange rate effects of monetary policy shocks in sticky price macroeconomic models, though the results of this paper also suggest that the latter models should be specified so as to capture simultaneous multi-country adjustments to shocks.

Suggested Citation

  • Michael Binder & Qianying Chen & Xuan Zhang, 2010. "On the Effects of Monetary Policy Shocks on Exchange Rates," CESifo Working Paper Series 3162, CESifo.
    • Handle: RePEc:ces:ceswps:_3162
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp3162.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Giuseppe De Arcangelis & Giorgio Di Giorgio, 1999. "Monetary policy shocks and transmission in Italy: A VAR analysis," Economics Working Papers 446, Department of Economics and Business, Universitat Pompeu Fabra.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Georgiadis, Georgios, 2016. "Determinants of global spillovers from US monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 41-61.
    2. Wieland, Volker & Binder, Michael & Lieberknecht, Philipp & Quintana, Jorge, 2017. "Model Uncertainty in Macroeconomics: On the Implications of Financial Frictions," CEPR Discussion Papers 12013, C.E.P.R. Discussion Papers.
    3. Ábel, István & Kóbor, Ádám, 2010. "A monetáris restrikció hatása strukturális VAR keretben [The effect of monetary restriction in a vector auto-regression framework]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 412-430.
    4. Elsayyad, May & Konrad, Kai A., 2012. "Fighting multiple tax havens," Journal of International Economics, Elsevier, vol. 86(2), pages 295-305.
    5. Georgiadis, Georgios, 2017. "To bi, or not to bi? Differences between spillover estimates from bilateral and multilateral multi-country models," Journal of International Economics, Elsevier, vol. 107(C), pages 1-18.
    6. Reinhold Heinlein & Hans-Martin Krolzig, 2013. "Monetary Policy and Exchange Rates: A Balanced Two-Country Cointegrated VAR Model Approach," Studies in Economics 1321, School of Economics, University of Kent.
    7. repec:wsr:wpaper:y:2015:i:146 is not listed on IDEAS
    8. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    9. Reinhold Heinlein & Hans-Martin Krolzig, 2011. "Effects of monetary policy on the $/£ exchange rate. Is there a 'delayed overshooting puzzle'?," Studies in Economics 1124, School of Economics, University of Kent.
    10. Kyriakos Drivas & Claire Economidou & Konstantinos N. Konstantakis & Panayotis G. Michaelides, 2022. "Technological Leaders, Laggards and Spillovers: A Network GVAR Analysis," Open Economies Review, Springer, vol. 33(2), pages 231-269, April.
    11. Qianying Chen & Marco Lombardi & Alex Ross & Feng Zhu, 2017. "Global impact of US and euro area unconventional monetary policies: a comparison," BIS Working Papers 610, Bank for International Settlements.
    12. Georgios Georgiadis, 2016. "To bi, or not to bi? Differences in Spillover Estimates from Bilateral and Multilateral Multi-country Models," EcoMod2016 9145, EcoMod.
    13. Kim, Seong-Hoon & Moon, Seongman & Velasco, Carlos, 2014. "Delayed Overshooting: It's an 80s Puzzle," Staff Papers 14-3, Korea Institute for International Economic Policy.
    14. Heinlein, Reinhold & Krolzig, Hans-Martin, 2012. "On the construction of two-country cointegrated VAR models with an application to the UK and US," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62310, Verein für Socialpolitik / German Economic Association.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mahmood-ul-Hasan Khan, 2008. "Short Run Effects of an Unanticipated Change in Monetary Policy: Interpreting Macroeconomic Dynamics in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 4, pages 1-30.
    2. Paolo Chiades & Leonardo Gambacorta, 2004. "The Bernanke and Blinder Model in an Open Economy: The Italian Case," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 1-34, February.
    3. Anna Florio, 2005. "Asymmetric monetary policy: empirical evidence for Italy," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 751-764.
    4. Carlo Migliardo, 2010. "Monetary Policy Transmission in Italy: A BVAR Analysis with Sign Restriction," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 4(2), pages 139-167, June.

    More about this item

    Keywords

    monetary policy; exchange rate overshooting; forward premium; global vector error correction Model;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3162. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.