Exchange Rates and the Information Channel of Monetary Policy

Discussion Papers 1906, 25 S.

Oliver Holtemöller, Alexander Kriwoluzky, Boreum Kwak

2020

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Abstract

We disentangle the effects of monetary policy announcements on real economic variables into an interest rate shock component and a central bank information shock component. We identify both components using changes in interest rate futures and in exchange rates around monetary policy announcements. While the volatility of interest rate surprises declines around the Great Recession, the volatility of exchange rate changes increases. Making use of this heteroskedasticity, we estimate that a contractionary interest rate shock appreciates the dollar, increases the excess bond premium, and leads to a decline in prices and output, while a positive information shock appreciates the dollar, decreases prices and the excess bond premium, and increases output.

Alexander Kriwoluzky

Head of Department in the Macroeconomics Department

Topics: Monetary policy



JEL-Classification: C36;E52;E58
Keywords: Monetary policy, central bank information shock, identification through heteroskedasticity, high-frequency identification, proxy SVAR