The Exchange Rate Response to Monetary Policy Innovations

Hnatkovska, Viktoria; Lahiri, Amartya; Végh, Carlos A.

doi:10.1257/mac.20140362

Cited by 33 publications

(40 citation statements)

References 39 publications

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“…Following an increase in the short-term interest rates relative to the US interest rate, the exchange rate volatility (filtered series) may increase due to a flow of funds into the exchange rate market. This finding was consistent with the Mundell-Fleming (M-F) model and in line with [2,5,8,17]. The IRFs implied that contractionary monetary policy implementations in these countries may lead to a deterioration in stability in currency markets and also other financial markets, which, in turn, may negatively affect the foreign competiveness of these countries and deteriorate real economic activity.…”

Section: Impulse Response Analysis Resultssupporting

confidence: 85%

“…When the scientific literature is examined, it has been recognised that VAR-type of models can be adopted to examine the impacts of monetary policy shocks on exchange rates. For instance, [8] found that the effect of a positive innovation in monetary policy is associated with an exchange rate appreciation in developed economies; it leads to significant depreciation in currencies of developing economies.…”

Section: Literature Reviewmentioning

confidence: 99%

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Analysis of the Role of Exchange Rate Volatility in Monetary Policy Conduction in OECD Countries: Empirical Evidence from Panel-VAR Models

Özçelebi¹

2018

Trade and Global Market

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In this study, panel vector autoregression (PVAR) models are employed to examine the relationships between industrial production growth rate, consumer price inflation, short-term interest rates, stock returns and exchange rate volatility. More specifically, I explored the consequences of the dynamics detected by the models on monetary policy implementation for 10 OECD countries. This study indicates that factors that may cause a rise in short-term interest rates with respect to the USA can lead to volatility in exchange rates and thus macroeconomic instability. It is also implied that sustaining macroeconomic growth and decreasing inflation can result in increased export performance, which in turn provides the amount of US dollars to curb volatility in US dollar quotations. Accordingly, this study reveals that high importance should be given to both monetary and non-monetary factors in the open-economy framework to detect the possible impacts on trade and capital flows by dynamic stochastic general equilibrium (DSGE) models.Due to their exchange rate risk of economic agents, I also suggest that the economic policy makers of these countries had better create a theoretical framework including financial frictions, economic agents' preferences and different shocks to smooth the variations in exchange rates and minimise the negative outcomes of Brexit.Keywords: panel vector autoregression, exchange rate volatility, monetary policy, macroeconomic and financial stability, OECD countries to the Taylor-rule framework, this paper focuses on the interactions between the industrial production growth rate, consumer price inflation, short-term interest rates, stock returns and exchange rate volatility by employing panel VAR (PVAR) methodology for 10 OECD countries outside the Euro area (Canada, Czech Republic, Iceland, Israel, Korea, Mexico, Norway, Poland, Sweden and the United Kingdom). More specifically, the impacts of industrial production growth rate, consumer price inflation, short-term interest rates and stock returns on exchange rate volatility are examined for those countries. Countries included in the panel Trade and Global Market

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Section: Impulse Response Analysis Resultssupporting

confidence: 85%

Section: Literature Reviewmentioning

confidence: 99%

Analysis of the Role of Exchange Rate Volatility in Monetary Policy Conduction in OECD Countries: Empirical Evidence from Panel-VAR Models

Özçelebi¹

2018

Trade and Global Market

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“…This finding presents critical challenges for academics and policymakers alike because of the inconsistency between theory and empirical evidence. Hnatkovska et al () intepret this finding as evidence of differential transmission mechanisms for monetary policy.…”

Section: Review Of Literaturementioning

confidence: 99%

“…Similar to Hnatkovska et al (2016), Cormun and Leo (2017) investigate the effects of shocks to US monetary policy on the value of currencies of other countries. Their findings confirm that when the US economic outlook worsens, developing countries' currencies significantly decline in value while their policycontrolled interest rates increase.…”

Section: Previous Empirical Studiesmentioning

confidence: 99%

Monetary policy responses of Asian countries to spillovers from US monetary policy

Pham

Phuc

2019

Asian-Pac Economic Lit

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Regional integration in Asia has been considerably enhanced over the past 20 years or so. Whether integration helps Asian countries reduce their vulnerability to external shocks or is a channel for spreading external shocks remains an open question. This paper assesses the spillovers from US monetary policy shocks to Asian countries while taking into account country‐specific characteristics in explaining differences in timing and magnitude of responses across Asian countries. The results indicate that policy interest rates in Asian countries generally respond to innovations in the Fed rate in the same direction, but typically with a lag of one quarter. However, the size of the responses varies across Asian countries with respect to country‐specific characteristics. These results suggest that an independent monetary policy may not be feasible for an Asian developing country that adopts a pegged rate regime while being extensively integrated into the world economy. However, the hypothesis of the impossible trinity may not be relevant in the case of China.

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“…Bjørnland (2009) argues that since exchange rate is an asset price, it should immediately respond to monetary policy shocks, possibly reflecting the news contained in the policy. Furthermore, event studies such as Zettelmeyer (2004) and Hnatkovska et al (2016) find significant contemporaneous responses of the exchange rate to a monetary policy shock in a range of countries.…”

Section: Introductionmentioning

confidence: 99%

Identification of Small Open Economy SVARs via Markov‐Switching Heteroskedasticity

Turnip

2017

Economic Record

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Various identifying restrictions commonly used in small open economy structural vector autoregression (SVAR) models are tested against an SVAR model identified via Markov-switching heteroskedasticity. The SVARs are estimated for three small open economies, Australia, Canada and New Zealand. The most supported model is the one that allows for simultaneity between monetary policy and the real exchange rate without restricting the long-run response of the real exchange rate to a monetary policy shock. The impulse responses to a monetary policy shock and an exchange rate shock identified from such model are consistent with theoretical predictions.

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The Exchange Rate Response to Monetary Policy Innovations

Cited by 33 publications

References 39 publications

Analysis of the Role of Exchange Rate Volatility in Monetary Policy Conduction in OECD Countries: Empirical Evidence from Panel-VAR Models

Analysis of the Role of Exchange Rate Volatility in Monetary Policy Conduction in OECD Countries: Empirical Evidence from Panel-VAR Models

Monetary policy responses of Asian countries to spillovers from US monetary policy

Identification of Small Open Economy SVARs via Markov‐Switching Heteroskedasticity

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