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

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