Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates

76 Pages Posted: 16 Feb 2017

See all articles by Massimo Ferrari

Massimo Ferrari

Catholic University of Milan, Students

Jonathan Kearns

Bank for International Settlements (BIS) - Monetary and Economic Department

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

Multiple version iconThere are 3 versions of this paper

Date Written: February 15, 2017

Abstract

We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower is the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.

Keywords: Exchange Rates, Unconventional Monetary Policy, Forward Guidance, Event Study, High Frequency Data

JEL Classification: E52, E58, F31

Suggested Citation

Ferrari, Massimo and Kearns, Jonathan and Schrimpf, Andreas, Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates (February 15, 2017). Available at SSRN: https://ssrn.com/abstract=2917454 or http://dx.doi.org/10.2139/ssrn.2917454

Massimo Ferrari

Catholic University of Milan, Students ( email )

Largo Gemelli 1
Milan, Milano 20123
Italy

Jonathan Kearns

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Andreas Schrimpf (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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