DP11918 Monetary policy's rising FX impact in the era of ultra-low rates

Author(s): Massimo Ferrari, Jonathan Kearns, Andreas Schrimpf
Publication Date: March 2017
Keyword(s): event study, Exchange Rates, forward guidance, High Frequency Data, Unconventional Monetary Policy
JEL(s): E52, E58, F31
Programme Areas: Financial Economics, International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11918

We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower is the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.