Download This PaperIdentifying Exchange Rate Effects and Spillovers of U.S. Monetary Policy Shocks in the Presence of Time-Varying Instrument Relevance
Liao W, Ma J, Zhang C. Identifying exchange rate effects and spillovers of US monetary policy shocks in the presence of time‐varying instrument relevance[J]. Journal of Applied Econometrics.
35 Pages Posted: 1 Jan 2020 Last revised: 18 Aug 2023
Date Written: December 12, 2019
Abstract
We propose a novel econometric approach to estimating the time-varying dynamic causal effects of policy shocks using external instruments in a factor augmented VAR (FAVAR) model. By focusing on the United States, Canada, Germany, Japan, and the United Kingdom, we document important time-varying spillover effects of U.S. monetary policy shocks on global inflation, output, and exchange rates. We fi nd that policy effects tend to strengthen during recessions and appear to be strongest during the 2008-2009 Great Financial Crisis (GFC). We fi nd no delayed overshooting of the exchange rate response to monetary policy shocks, and present evidence of an important
contribution of monetary policy shocks to exchange rate variations.
Keywords: monetary policy spillover, exchange rate dynamics, time varying factor-augmented SVAR-IV, stochastic volatility
JEL Classification: E52, F31, C32
Suggested Citation: Suggested Citation