Exchange Rates and Monetary Policy Uncertainty

42 Pages Posted: 20 Dec 2015 Last revised: 11 Dec 2016

Date Written: June 20, 2016


We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-a-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

Keywords: Monetary Policy, Foreign Exchange, Uncertainty

JEL Classification: E52, E58, F31

Suggested Citation

Mueller, Philippe and Tahbaz-Salehi, Alireza and Vedolin, Andrea, Exchange Rates and Monetary Policy Uncertainty (June 20, 2016). Journal of Finance, Forthcoming; Columbia Business School Research Paper No. 16-3. Available at SSRN: or

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Alireza Tahbaz-Salehi (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Andrea Vedolin

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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