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