Permanent U.S. monetary shocks impact exchange rates and interest differentials
The study looked at how U.S. monetary policy changes affect exchange rates and interest rates in the short term. They found that when U.S. interest rates go up permanently, the dollar decreases in value in the short term. This also causes short-term deviations in interest rates on U.S. assets. These effects are different from what happens with temporary monetary policy changes. The results match predictions from a new Keynesian model of the open economy.