Unconventional Monetary Policy and International Risk Premia

33 Pages Posted: 1 Jul 2016

See all articles by John H. Rogers

John H. Rogers

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section

Chiara Scotti

Board of Governors of the Federal Reserve System

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: 2016-05-31

Abstract

We assess the relationship between monetary policy, foreign exchange risk premia and term premia at the zero lower bound. We estimate a structural VAR including U.S. and foreign interest rates and exchange rates, and identify monetary policy shocks through a method that uses these surprises as the crucial "external instrument" that achieves identification without having to use implausible short-run restrictions. This allows us to measure effects of policy shocks on expectations, and hence risk premia. U.S. monetary policy easing shocks lower domestic and foreign bond risk premia, lead to dollar depreciation and lower foreign exchange risk premia. We present some evidence that U.S. monetary policy easing surprises at the ZLB shift options-implied skewness in the direction of dollar depreciation and also reduce the demand for the liquidity of short-term U.S. Treasuries. Both of these channels should lower foreign exchange risk premia.

Suggested Citation

Rogers, John H. and Scotti, Chiara and Wright, Jonathan H., Unconventional Monetary Policy and International Risk Premia (2016-05-31). FRB International Finance Discussion Paper No. 1172. Available at SSRN: https://ssrn.com/abstract=2803075 or http://dx.doi.org/10.17016/IFDP.2016.1172

John H. Rogers (Contact Author)

Board of Governors of the Federal Reserve System - Trade and Financial Studies Section ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2873 (Phone)
202-736-5638 (Fax)

Chiara Scotti

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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