Discussion Paper Details

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

Author(s): Massimo Ferrari, Jonathan Kearns and Andreas Schrimpf

Publication Date: March 2017

Keyword(s): event study, Exchange Rates, forward guidance, High Frequency Data and Unconventional Monetary Policy

Programme Area(s): Financial Economics and International Macroeconomics and Finance

Abstract: 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.

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Bibliographic Reference

Ferrari, M, Kearns, J and Schrimpf, A. 2017. 'Monetary policy's rising FX impact in the era of ultra-low rates'. London, Centre for Economic Policy Research.