Monetary shocks, exchange rates and trade balances: Evidence from inflation targeting countries

Monetary Policy and the Economy in South Africa

“…1 Various models estimated used certain assumptions, such as the co-integration relationship among variables, and through imposing other structural restrictions. Ivrendi and Guloglu (2010) argue that most of the conflicting empirical results in the empirical literature are due to the consequences of restrictions imposed on the models stated above. Ivrendi and Guloglu (2010) investigated the relationships between monetary policy shocks, the exchange rate and the trade balance in five inflation-targeting countries using SVECM, with both long-run and short-run restrictions.…”

“…Ivrendi and Guloglu (2010) argue that most of the conflicting empirical results in the empirical literature are due to the consequences of restrictions imposed on the models stated above. Ivrendi and Guloglu (2010) investigated the relationships between monetary policy shocks, the exchange rate and the trade balance in five inflation-targeting countries using SVECM, with both long-run and short-run restrictions. 2 They found that a contractionary monetary policy shock leads to an improvement in the trade balance, contradicting the findings of trade puzzles reported in many empirical studies.…”

“…Generally, this chapter compares the effects of contractionary monetary policy and exchange rate appreciation shocks on the trade balance. Ivrendi and Guloglu (2010) explained two theoretical hypotheses linking monetary policy to both exchange rates and the trade balance in open economies. Monetary policy affects the exchange rate through a hypothesis concerning overshooting, which suggests that a contractionary monetary policy shock initially leads to the appreciation of the exchange rate followed by a gradual depreciation (Koray and McMillin 1999).…”

Asset prices and expected monetary policy: evidence from daily data

“…While Leduc et al (2007) focus on the sources of high inflation in the 1970s, Mehra and Herrington (2008) deal with the sources of movements in the public's expectation of inflation and Ivrendi and Guloglu (2010) look at the relationships among monetary policy shocks, exchange rates and trade balances in inflation targeting countries, we investigate the relationships among market participants' expectations of future US monetary policy and asset prices and whether the relationships depend on the state of the economy. Our investigation is based on high frequency data (daily) rather than on lower frequency data (monthly or quarterly data) that are commonly used in macroeconomic and financial market analyses.…”

“…Our investigation regarding the relationships between market participants' expectations of future monetary policy and asset prices employs a structural VAR (SVAR) model similar to those of Leduc et al (2007), Mehra and Herrington (2008) and Ivrendi and Guloglu (2010). While Leduc et al (2007) focus on the sources of high inflation in the 1970s, Mehra and Herrington (2008) deal with the sources of movements in the public's expectation of inflation and Ivrendi and Guloglu (2010) look at the relationships among monetary policy shocks, exchange rates and trade balances in inflation targeting countries, we investigate the relationships among market participants' expectations of future US monetary policy and asset prices and whether the relationships depend on the state of the economy.…”