COVID-19 and Exchange Rates: Spillover Effects of U.S. Monetary Policy

Abstract

This paper investigates the spillover effects of U.S. monetary policy on exchange rates of 11 emerging markets and 12 advanced economies during the pre-COVID-19 period of 2019 versus the COVID-19 period of 2020. The investigation is achieved by a structural vector autoregression model, where year-on-year changes in weekly measures of economic activity, exchange rates and policy rates are used. The empirical results suggest evidence for the spillover effects of U.S. monetary policy for several countries during the pre-COVID-19 period, whereas they have been effective only for certain countries during the COVID-19 period that can be explained by the disease outbreak channel. It is implied that policies keeping the pandemic under control may help mitigate the unforeseen economic effects of the COVID-19 crisis.

Keywords: COVID-19, Coronavirus, Exchange Rates, Monetary Policy, Reaction Function, Google Mobility, Spillover Effects

JEL Classification: E52, E58, F31, F42