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On The Effects Of Monetary Policy Shocks On Exchange Rates

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Executive Summary

In this paper, the authors re-consider the effects of monetary policy shocks on exchange rates and forward premia. In the recent empirical literature, these effects have been predominantly described as puzzling, in that they would include delayed overshooting of the exchange rate as well as persistent deviations from uncovered interest parity. They specify an empirical model that in particular allows for simultaneous multi-country adjustments in response to monetary policy shocks, and takes advantage of the identifying restrictions for monetary policy shocks implied by empirically supported long-run relations between the macroeconomic variables under consideration.

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