Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates
55 Pages Posted: 29 Apr 2017
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Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates
Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates
Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates
Date Written: April 7, 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 the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.
Monetary Policy's Rising FX Impact in the Era of Ultra-Low Rates: Supplementary Internet Appendix
Keywords: Rates, Unconventional Monetary Policy, Forward Guidance, Event Study, High Frequency Data
JEL Classification: E52, E58, F31
Suggested Citation: Suggested Citation