Monetary policy responses to the exchange rate: Empirical evidence from the ECB

Abstract

a b s t r a c t a r t i c l e i n f oThe exchange rate is an important part of the transmission mechanism in the determination of monetary policy because movements in the exchange rate have significant effect on the macroeconomy. It can be difficult to measure the reaction of monetary policy to the movements of the exchange rate, due to the simultaneous response of monetary policy to the exchange rate and the possibility that both variables respond to several other variables. This study addresses these problems by using an identification method based on the heteroscedasticity in the high-frequency data. The results in this paper suggest that the ECB systematically responds to exchange rate movements but that quantitative effects are small. Such a significant but small reaction coefficient seems consistent with the hypothesis that the central banks do not target the fluctuations in the exchange rate but consider them only to the extent they impact on the expected inflation and output path.

Spillover effects of unconventional monetary policy on capital markets in the shadow of the Eurozone: A sample of non-Eurozone countries

“…The standard deviations of interest rates and interest premiums were calculated against German 10Y government bond yields because the 10Y maturity is less affected by liquidity turbulences or monetary policy decisions. Following Demir (2014), due to data availability and flexibility, the output gap was calculated from the industrial production index against its HP filtered values. First differences were used for all variables, and they were tested against unit root by the Im, Pesaran and Shin (2003) test, as the results in Table 3 present.…”

Monetary Policy Transmission Through the Rate Channel in Some Countries in ASEAN

“…For an open economy, changes in short -term interest rates also affect the economy through the exchange rate channel. In emerging countries with underdeveloped financial markets, the exchange rate channel is an important channel of monetary policy management for the central bank (Demir, 2014;Golinelli & Rovelli, 2002). For the exchange rate channel to be effective, it is necessary to have an exchange rate mechanism with a certain degree of flexibility, combined with high elasticity of import and export goods with changes in prices.…”

Does Pak-Rupee Exchange Rate Respond to Monetary Fundamentals? A Structural Analysis

“…The exchange rate is considered as an important component of transmission mechanism of monetary policy because movements in exchange rate have significant impacts on the overall economy [Demir (2014)]. The exchange rate may influence macroeconomic fundamentals through three main channels.…”

“…Since, households are assumed to have inter-temporal smoothing behaviour; a direct decrease in net wealth may lead to a drop in consumption. Third, the exchange rate depreciation may increase the value of collateral, which may reduce external financing constraints and therefore final spending [Demir (2014)]. Taylor (2001) highlighted that exchange rate determines terms of trade and hence influences the overall imports and exports of the country.…”