Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates

Martin Eichenbaum, Charles L Evans

Research output: Contribution to journalArticlepeer-review

422 Scopus citations

Abstract

This paper investigates the effects of shocks to U. S. monetary policy on exchange rates. We consider three measures of these shocks: orthogonalized shocks to the federal funds rate, orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the Romer and Romer index of monetary policy. In sharp contrast to the literature, we find substantial evidence of a link between monetary policy and exchange rates. Specifically, according to our results a contractionary shock to U. S. monetary policy leads to (i) persistent, significant appreciations in U. S. nominal and real exchange rates and (ii) significant, persistent deviations from uncovered interest rate parity in favor of U. S. interest rates.
Original languageEnglish
Pages (from-to)975-1009
JournalThe Quarterly Journal of Economics
Volume110
DOIs
StatePublished - 1995

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