Economics, Econometrics and Finance
4 years ago

Monetary policy shocks drive foreign exchange market fluctuations and overshooting.

Journal of International Economics
Fluctuations in the foreign exchange market: How important are monetary policy shocks?
Hafedh Bouakez, Michel Normandin

Paper Summary

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The article examines how U.S. monetary policy shocks affect exchange rates with G7 countries. By using a specific statistical method, the researchers found that a monetary expansion causes the exchange rate to drop for about ten months before rising again. This shock also leads to significant deviations from uncovered interest rate parity. Overall, monetary policy shocks play a substantial role in exchange rate fluctuations.