DP14034 The Dollar During the Great Recession: US Monetary Policy Signaling and The Flight To Safety

Author(s): Vania Stavrakeva, Jenny Tang
Publication Date: October 2019
JEL(s): E52, F31, G01
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14034

Conventional wisdom holds that lowering a home country's interest rate relative to another's will depreciate the domestic currency. We document that US monetary policy easings actually had the opposite effect during the Great Recession. We attribute this effect to calendar-based forward guidance that signaled economic weakness which resulted in a flight-to-safety effect and lower expected inflation in the United States. Our results imply that accusations that the Federal Reserve engaged in a "competitive devaluation" over the Great Recession were unfounded.