Monetary Policy Surprises and Exchange Rate Behavior

55 Pages Posted: 22 Sep 2020

See all articles by Refet S. Gürkaynak

Refet S. Gürkaynak

Bilkent University - Department of Economics

Hakan Kara

Central Bank of Turkey; Bilkent University

Burçin Kısacıkoğlu

Bilkent University - Department of Economics

Sang Seok Lee

Bilkent University

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 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 eventstudies 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 eventstudy and model implications for these. We find that there is heterogeneity in this dimension in the eventstudy 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 eventstudy analysis with model-based mechanisms of asset pricing.

Keywords: central bank information effect, Exchange rate response to monetary policy, open economy macro-finance modeling

JEL Classification: E43, E44, E52, E58, G14

Suggested Citation

Gürkaynak, Refet S. and Kara, A. Hakan and Kısacıkoğlu, Burçin and Lee, Sang Seok, Monetary Policy Surprises and Exchange Rate Behavior (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3696372

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

Bilkent University ( email )

Bilkent, Ankara 06533
Turkey
06800 (Fax)

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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