Monetary policy surprises and exchange rate behavior

Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using
Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy that the central bank is signaling by its policy may explain the abnormality. It turns out that many informational assumptions make a standard two- country New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event study and model implications for these. We find that there is heterogeneity in this dimension in the event study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event study analysis with model-based mechanisms of asset pricing.
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Metadaten
Author:Refet S. Gürkaynak, Hakan Kara, Burçin Kısacıkoğlu, Sang Seok Lee
URN:urn:nbn:de:hebis:30:3-554977
URL:http://dx.doi.org/10.2139/ssrn.3696063
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 642
Series (Serial Number):CFS working paper series (642)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2020
Year of first Publication:2020
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2020/09/21
Tag:central bank information effect; exchange rate response to monetary policy; open economy macro-finance modeling
Pagenumber:55
HeBIS PPN:47013982X
Institutes:Wirtschaftswissenschaften
Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E43 Determination of Interest Rates; Term Structure of Interest Rates
E44 Financial Markets and the Macroeconomy
E52 Monetary Policy
E58 Central Banks and Their Policies
G14 Information and Market Efficiency; Event Studies
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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