Monetary Policy Surprises and Exchange Rate Behavior

53 Pages Posted: 14 Sep 2020 Last revised: 4 Jan 2021

See all articles by Refet S. Gürkaynak

Refet S. Gürkaynak

Bilkent University - Department of Economics

Hakan Kara

Central Bank of Turkey

Burçin Kısacıkoğlu

Bilkent University - Department of Economics

Sang Seok Lee

Bilkent University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2020

Abstract

Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event-studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy that the central bank is signaling by its policy may explain the abnormality. It turns out that many informational assumptions make a standard two-country New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event-study and model implications for these. We find that there is heterogeneity in this dimension in the event-study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event-study analysis with model-based mechanisms of asset pricing.

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Suggested Citation

Gürkaynak, Refet S. and Kara, A. Hakan and Kısacıkoğlu, Burçin and Lee, Sang Seok, Monetary Policy Surprises and Exchange Rate Behavior (September 2020). NBER Working Paper No. w27819, Available at SSRN: https://ssrn.com/abstract=3692176

Refet S. Gürkaynak (Contact Author)

Bilkent University - Department of Economics ( email )

06533 Ankara
Turkey

A. Hakan Kara

Central Bank of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara
Turkey

Burçin Kısacıkoğlu

Bilkent University - Department of Economics ( email )

Bilkent University FEASS
Department of Economics
Bilkent, 06800
Turkey

Sang Seok Lee

Bilkent University ( email )

Bilkent, 06533
Turkey

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