Exchange Rates and Monetary Policy

49 Pages Posted: 28 Jan 2016 Last revised: 28 Nov 2017

See all articles by Vania Stavrakeva

Vania Stavrakeva

London Business School

Jenny Tang

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: 2015-10-29


In this paper we confront the data with the financial-market folk wisdom that monetary policy is one of the key drivers of nominal exchange rates. Focusing on measures of conventional and unconventional monetary policy, we find that monetary policy surprises and changes in expectations about future monetary policy can explain a sizable fraction of the variation in exchange rate changes for certain currency pairs. However, our results show that expected excess returns account for most of this variation. We also find that the importance unconventional monetary policy plays for explaining exchange rate changes is larger in the period since the United States hit the zero lower bound in December 2008. In contrast, the importance of conventional monetary policy is lower during this period due to a decrease in the volatility of monetary policy surprises. Meanwhile, the marginal response of exchange rate changes relative to conventional policy surprises actually has strengthened due to a change in the relationship between these surprises and expected excess returns.

JEL Classification: E43, F31, G12, G15

Suggested Citation

Stavrakeva, Vania and Tang, Jenny, Exchange Rates and Monetary Policy (2015-10-29). FRB of Boston Working Paper No. 15-16. Available at SSRN:

Vania Stavrakeva (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Jenny Tang

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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