Exchange Rates and Monetary Policy Uncertainty

Philippe Mueller, Alireza Tahbaz-Salehi, Andrea Vedolin

Research output: Contribution to journalArticlepeer-review

32 Scopus citations

Abstract

We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

Original languageEnglish (US)
Pages (from-to)1213-1252
Number of pages40
JournalJournal of Finance
Volume72
Issue number3
DOIs
StatePublished - Jun 2017

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Exchange Rates and Monetary Policy Uncertainty'. Together they form a unique fingerprint.

Cite this