the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

the open economy consequences of u s monetary policy a failure to identify movements in the federal funds rate that are both unpredictable and independent of other determinants of open economy variables may lead to attenuation bias in the estimated effects of u s monetary policy on the exchange rate and foreign variables using a u s monetary policy measure which isolates unpredictable and independent federal funds rate changes we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables the exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively identified var estimate there is stronger evidence of foreign interest rate pass through the expenditure reducing effects of a u s monetary policy contraction dominate any expenditure switching effects leading to a positive conditional correlation of international outputs and prices we compare our results with those obtained using identification based upon 1 non recursive var restrictions and 2 restrictions derived from high frequency asset price behavior

alternative maximum likelihood estimation of structural vector autoregressive models partially identified with short run restrictions this paper presents an alternative maximum likelihood estimation method for partially identified vector autoregressive models this method might be especially useful to handle very large systems of variables by reducing the dimension of the likelihood space as an application we consider an open economy model to investigate the effects of monetary policy on exchange rates and term structures we find that exchange rates tend to overshoot and term structures have hump shaped responses to monetary policy shocks

some empirical evidence on the effects of shocks to monetary policy on exchange rates this paper investigates the effects of shocks to u s monetary policy on exchange rates we consider three measures of these shocks orthogonalized shocks to the federal funds rate orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the romer and romer index of monetary policy in sharp contrast to the literature we find substantial evidence of a link between monetary policy and exchange rates specifically according to our results a contractionary shock to u s monetary policy leads to i persistent significant appreciations in u s nominal and real exchange rates and ii significant persistent deviations from uncovered interest rate parity in favor of u s interest rates

how do fiscal and technology shocks affect real exchange rates new evidence for the united states abstract using vector autoregressions on u s time series relative to an aggregate of industrialized countries this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade to achieve identification we derive robust restrictions on the sign of several impulse responses from a two country general equilibrium model we find that both the real exchange rate and the terms of trade whose responses are left unrestricted depreciate in response to expansionary government spending shocks and appreciate in response to positive technology shocks

what macroeconomic risks are not shared by international investors adopting an asset market view of international risk sharing we identify various sources of macroeconomic risk faced by international investors using a structural vector autoregression model we find that most of the risks of exogenous financial market shocks are shared by international investors through the existing asset markets however other macroeconomic risks such as those associatedwith exogenousshocks to consumption growth inflationandmonetarypolicies arenot fullysharedacrosscountries this finding helps us understand the apparently contradicting perceptions of international risk sharing generated by the analysis of asset market returns versus that of aggregate consumption growth across countries jel codes e44 f31 g12

liquidity and exchange rates abstract we present a two country extension of lucas s 1988a work on cash in advance constraints in asset markets in the model there is temporary separation between the goods and asset markets and money is used for transactions in both we first find that the exchange rate level depends on the share of money used for asset transactions a greater share appreciates the currency second stochastic open market operations increasing the domestic bonds supply appreciate the domestic currency third the liquidity effects of bond supply shocks cause an excess volatility of nominal exchange rates even when their fundamental value is constant

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

evidence on the cross country transmission of monetary shocks the international transmission of monetary shocks between the us and canada is explored focusing on real variables such as consumption investment employment and the bilateral trade balance along with measures of us and canadian money the empirical analysis examines the impact of a monetary shock in one country on real activity in both countries the long run analysis provides evidence of cointegration among the variables and suggests that money plays an important role in the equilibrium relationships between the two countries variance decompositions and impulse response functions reveal interesting avenues of real transmission in the short run the short run analysis provides strong evidence that us monetary shocks affect real activity in both the usa and canada the analysis also indicates that canadian monetary disturbances affect canadian and us real activity and that many of these effects are similar in magnitude to the effects of us monetary shocks the importance of the nominal exchange rate

macroeconomic policy transmission and international interdependence a svar application to brazil and us economic policy transmission between trade partners has been analyzed over different contexts in the literature depending on real or nominal frictions the results indicate possible beggar thy neighbor effects for policies given international trade and need for coordinating policies the baseline model is corsetti and pesenti 2001 of macroeconomic interdependence the theoretical proposition suggests that a no anticipated economic policy of exchange rate depreciation creates a beggar thyself effect yet many economies have engaged in this policy to enhance exports and improve welfare here fiscal policy transmissions over brazilian economic aggregates are investigated considering brazil as home and us as foreign country the problem is specified in a structural var vector autoregression model taking granger causality tests and impulse response analysis as econometric applications the results indicate that expansionary fiscal policy in us has a beggar thy neighbor effect for the brazilian economy in the long run the policy transmission mechanism relies on the terms of trade in addition real money balances are affected by foreign fiscal policy affecting the efficiency of domestic monetary policy 2013 national association of postgraduate centers in economics anpec production and hosting by elsevier b v all rights reserved jel classification f41 f42

do sticky prices increase real exchange rate volatility at the sector level abstract we introduce the real exchange rate volatility curve as a useful device to understand the relationship between price stickiness and the fluctuations in law of one price deviations in the presence of both nominal and real shocks the theory predicts that the real exchange rate volatility curve is a u shaped function of the degree of price stickiness using sector level us european real exchange rate data and frequency of price changes we estimate the volatility curve and find the predominance of real effects over nominal effects good by good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level consistent with significant averaging out of good specific real microeconomic shocks

monetary policy foreign exchange policy and delayed overshooting this paper provides an explanation for delayed overshooting puzzle based on foreign exchange policy s reaction to monetary policy for canada in which ample interactions between monetary and foreign exchange policies are found foreign exchange policy reaction mitigates the initial effects of monetary policy shocks on the exchange rate as the effects of the monetary policy shocks are more prolonged than that of the foreign exchange policy reaction the maximum effect is found in delay

the extensive margin and monetary policy abstract the creation of new firms referred to as the extensive margin is a significant but overlooked dimension of monetary policy a monetary var documents that monetary policy has significant effects on firm creation an analytically tractable model combining sticky prices and firm entry shows that entry alters the transmission of monetary policy innovations acting much like a type of investment in more standard models monetary policy rules that offset the uncertainty of productivity shocks can raise the mean level of entry and thereby welfare suggesting a new motivation for stabilization policy

oil prices inflation and interest rates in a structural cointegrated var model for the g 7 countries sharp increases in the price of oil are generally seen as a major contributor to business cycle asymmetries moreover the very recent highs registered in the world oil market are causing concern about possible slowdowns in the economic performance of the most developed countries in this paper a structural cointegrated var model has been considered for the g 7 countries in order to study the direct effects of oil price shocks on output and prices and the reaction of monetary variables to external shocks our results can be summarized as follows i a stationary money demand as suggested by the classic theory of money can be identified for most countries ii according to the estimated coefficients of the structural part of the model for all countries except japan and u k the null hypothesis of an influence of oil prices on the inflation rate cannot be rejected inflation rate shocks are transmitted to the real economy by increasing interest rates iii impulse response analysis suggests for most countries the existence of an instantaneous temporary effect of oil price innovations on prices iv impulse response functions indicate different monetary policy reactions to inflationary and growth shocks v the simulation exercises directed to estimate the total impact of the 1990 oil price shock indicate that for some countries u s a significant part of the effects of the oil price shock is due to the monetary policy reaction function for other countries canada france and italy however the total impact is offset at least in part by an easing of monetary conditions

the dynamic eects of monetary policy a structural factor model approach we use the structural factor model proposed by forni giannone lippi and reichlin 2007 to study the eects of monetary policy the advantage with respect to the traditional vector autoregression model is that we can exploit information from a large data set made up of 112 us monthly macroeconomic series monetary policy shocks are identified using a standard recursive scheme in which the impact eects

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

openness imperfect exchange rate pass through and monetary policy abstract this paper analyses the implications of imperfect exchange rate pass through for optimal monetary policy in a linearised open economy dynamic general equilibrium model calibrated to euro area data imperfect exchange rate pass through is modelled by assuming sticky import price behaviour the degree of domestic and import price stickiness is estimated by reproducing the empirical identified impulse response of a monetary policy and exchange rate shock conditional on the response of output net trade and the exchange rate it is shown that a central bank that wants to minimise the resource costs of staggered price setting will aim at minimising a weighted average of domestic and import price inflation

a positive theory of the earnings relationship of unemployment benefits in a wage bargaining model a stronger earnings relationship of unemployment benefits may reduce wages therefore the benefit structure significantly influences profits and trade union utility raising the question as to how the benefit structure is determined in the political process we consider a government that chooses the earnings relationship in order to maximize its political support our model predicts a strong earnings relationship under right wing governments and a weak relationship when unions are influential using panel data for 19 oecd countries we find support for these theoretical predictions moreover we show that the earnings relationship varies negatively with openness

what does the bank of japan do to east asia abstract in recent policy debates some have argued that expansionary monetary policy in japan can increase real output in japan and in japan s neighbors while others have warned that it is a beggar thy neighbor policy in this paper we estimate structural vector autoregressions to assess the effects of japanese monetary policy shocks we find that the effects of japanese monetary policy shocks on macroeconomic variation in east asia have been modest and difficult to reconcile with the beggar thy neighbor view we estimate that the asian crisis was preceded by expansionary monetary policy shocks in japan but we fail to find support for the view that these shocks contributed to the crisis

the role of monetary shocks and real shocks on the current account the terms of trade and the real exchange rate dynamics a svar analysis the article is an empirical investigation of the role of monetary shocks and real shocks on the current account the terms of trade and the real exchange rate dynamics three new open economy macro economics noem models are studied to motivate the empirical investigation then i apply the blanchard quah decomposition to identify a svar model the empirical evidence supports the noem model with the simplified household preference specification and with the small degree of pricing to market the evidence also illustrates monetary shocks important for the real exchange rate and the terms of trade movements but not for the current account fluctuations

to bi or not to bi differences between spillover estimates from bilateral and multilateral multi country models abstract asymptotic analysis and monte carlo simulations show that spillover estimates obtained from widely used bilateral such as two country var models are in general less accurate both in terms of bias and mean squared error than those obtained from multilateral such as global var models in particular the accuracy of spillover estimates obtained from bilateral models depends on two aspects of economies integration with the rest of the world first accuracy worsens as direct bilateral transmission channels become less important for example when the spillover sender accounts only for a small share of the spillover recipient s overall integration with the rest of the world second accuracy worsens as indirect higher order spillovers and spillbacks become more important for example when the spillover recipient is more integrated with the rest of the world overall empirical evidence on the global output spillovers from us monetary policy is consistent with these generic results spillover estimates obtained from two country var models are systematically smaller than those obtained from a global var model and the differences between spillover estimates obtained from two country var models and a global var model are more pronounced for economies for which the us accounts for a smaller share of their overall trade and financial integration with the rest of the world and for economies which are more integrated with the rest of the world overall

the world is not enough small open economies and regional dependence in this paper we explicitly introduce regional factors into a global dynamic factor model we combine new open economy factor models emphasizing global shocks with the recent findings of regional importance in the business cycle synchronization literature the analysis is applied to a large panel of domestic data for four small open economies we find that global and regional shocks explain roughly 30 and 20 percent respectively of the business cycle variation in all countries while global shocks have most impact on trade variables regional shocks explain a relatively large share of the variation in cost variables

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

u s monetary policy surprises identification with shifts and rotations in the term structure we develop a model to extract measures of monetary policy surprises from the maturity structure of the yield curve the model endogenously allows for the fact that the yield curve may either shift or rotate in response to monetary policy shocks a latent factor model approach with identification through heteroskedasticity harnesses the term structure to extract monetary policy shocks the approach offers informational advantages over event studies results from the u s term structure from 1994 strongly support the hypothesis that differing term structure responses are reactions to different types of monetary policy shock rather than differing reactions to the same policy shock

exchange rates and fundamentals new evidence from real time data abstract this paper analyses the link between economic fundamentals and exchange rates by investigating the importance of real time data we find that economic news in the united states germany and the euro area have been a driving force behind daily us dollar euro dem exchange rate developments in the period 1993 2003 the larger importance of us macroeconomic news is at least partly explained by their earlier release time compared to corresponding german and euro area news the exchange rate is also shown to respond more strongly to news in periods of large market uncertainty and when negative or large shocks occur overall the model based on real time data explains about 75 of the monthly directional changes of the us dollar euro exchange rate although it does not explain well the magnitude of the exchange rate changes

political accountability and the room to maneuver a search for a causal chain many studies of the room to maneuver make no provision for popular evaluation of policy they assert rather than demonstrate popular satisfaction with policy choices and macroeconomic outcomes the authors present a framework that explicitly models channels for popular preferences to influence policies and outcomes results for economic policy making in britain do not support the room to maneuver thesis in the authors sample 1981 to 1997 the british government was responsive to changes in political evaluations and its policy choices effectively fed back into popular evaluations of government policy however this accountability mechanism worked outside the real economy shifts in popular evaluations induced changes in policy but had no impact on inflation and economic growth government capacity to shape macroeconomic outcomes was limited and popular influence over economic policy was ineffectual this form of accountability probably existed because british citizens had difficulty gauging the real impacts of their government s policies

forward discount puzzle and liquidity effects some evidence from exchange rates among the united states canada and japan this paper empirically examines whether the interaction between foreign exchange markets and monetary markets can help to resolve the forward discount puzzle following the monetary models of lucas 1990 and fuerst 1992 we define as liquidity effects the negative impact of monetary injection on nominal interest rates temporary deviations from the standard euler equation the liquidity effect identified by these models weakens the linkage between current forward rates and expected future spot rates and improves on the standard rational expectations model that predicts a one to one correspondence between the two using time series of exchange rates among the united states canada and japan this paper shows that the liquidity measure identified above has an impact on forward premiums and that once the liquidity effect is taken into consideration the unbiased prediction of the forward discount rate is recovered to some extent in a theoretically consistent manner

the high frequency response of the eur usd exchange rate to ecb communication we investigate the impact of the european central bank s monetary policy communication during the press conference held after the monthly governing council meeting on the eur usd exchange rate in high frequency based on the method of content analysis we construct communication indicators for the introductory statement and find that communication with respect to future price developments is most relevant in response to statements about increasing risks to price stability the eur appreciates on impact to the contrary communication about economic activity and monetary aggregates does not generate significant exchange rate reactions

economic momentum and currency returns abstract past trends in fundamentals linked to economic activity and inflation predict currency returns we find that a trading strategy that goes long currencies with strong economic momentum and short currencies with weak economic momentum exhibits an annualized sharpe ratio of 0 70 and yields a significant alpha when controlling for standard carry momentum and value strategies the economic momentum strategy subsumes the alpha of carry trades suggesting that differences in past economic trends capture cross country differences in carry

liquidity capital controls and exchange rates abstract we present a two country extension of lucas 1990 work on how cash in advance constraints in asset markets affect the pricing of financial assets in the model there is some degree of separation between the goods markets and the asset markets and money is used for transactions in both markets the main results of the paper are the following first the equilibrium level of the exchange rate depends on the share of money used for asset transactions a greater share corresponds to a more appreciated currency second capital controls in the form of taxes on foreign asset acquisitions tend to appreciate the exchange rate third the maturity structure of the public debt affects the equilibrium exchange rate in particular a move towards a longer maturity structure will tend to depreciate the exchange rate jel 31

the response of asset prices to monetary policy shocks stronger than thought standard macroeconomic theory predicts rapid responses of asset prices to monetary policy shocks small scale vector autoregressions vars however often find sluggish and insignificant impact effects using the same high frequency instrument to identify monetary policy shocks we show that a large scale dynamic factor model finds overall stronger and quicker asset price reactions compared to a benchmark var both on euro area and us data our results suggest that incorporating a sufficiently large information set is crucial to estimate monetary policy effects

do markets care who chairs the central bank this paper assesses the effects of central bank governor appointments on financial market expectations of monetary policy to measure these effects we assemble a new dataset of appointment announcements from 15 countries and conduct an event study analysis on exchange rates bond yields and stock prices our main findings are threefold first exchange rates and bond yields display a statistically significant response to the announcement of a new governor especially when the appointee s identity was not anticipated in advance second the reactions are especially pronounced for central banks lacking either independence or a clear nominal anchor third new governors are not generally perceived to lack credibility there is no tendency for announcements to be associated with jumps in inflation expectations

monetary policy and exchange rate interactions in a small open economy the transmission mechanisms of monetary policy in a small open economy like norway are analysed through structural vars with special emphasis on the interdependence between monetary policy and exchange rate movements by imposing a long run neutrality restriction on the real exchange rate thereby allowing the interest rate and the exchange rate to react simultaneously to news i find considerable interdependence between monetary policy and the exchange rate in particular following a contractionary monetary policy shock the real exchange rate immediately appreciates after which it gradually depreciates back to the baseline the results are found to be consistent with findings from an event study

do exchange rate shocks have asymmetric effects on reserve accumulation evidence from emerging markets it is generally argued that central banks in emerging market countries motivated by a desire to defend export competitiveness tend to intervene in foreign exchange markets to limit currency appreciations rather than depreciations using panel data from 13 emerging market countries for the period 1998 m1 to 2016 m12 we find that exchange rate shocks play an important role in determining the accumulation of international reserves moreover we find evidence that central banks in emerging markets tend to follow a leaning against the depreciation wind policy rather than the appreciation wind i e we provide evidence of a fear of depreciation

overshooting and the exchange rate disconnect puzzle a reappraisal transitions to floating exchange rate regimes have led to sharp increases in exchange rate volatilities with no corresponding changes in the distribution of macroeconomic fundamentals in the spirit of dornbusch 1976 we assess whether nominal exchange rate overshooting is responsible for this phenomenon as long as uncovered interest rate parity holds nominal exchange rate overshooting is linked to a persistent fall in the spread between domestic and foreign nominal interest rates we thus develop a limited participation model in a small open economy setting with small adjustment costs on money holdings overshooting substantially contributes to the nominal exchange rate volatility

the transmission of international shocks to the uk estimates based on a time varying factor augmented var the aim of this paper is to gauge the importance of foreign demand supply and interest rate shocks on the uk economy and assess how their role has changed over time to that end we devise a time varying factor augmented var model that captures the relationship between 17 industrialised countries and the uk and accounts for any temporal evolution in this relationship the response of uk macroeconomic variables to a foreign interest rate shock is estimated to have changed significantly since the early 1990s international demand shocks play an important role in driving world and uk real activity especially during the recent recession

the transmission of international shocks a factor augmented var approach the empirical literature on the transmission of international shocks is based on small scale vars in this paper we use a large panel of data for 17 industrialized countries to investigate the international transmission mechanism and revisit the anomalies that arise in the empirical literature we propose a factor augmented var favar that extends the model in bernanke boivin and eliasz 2003 to the open economy the main results can be summarized as follows first the dynamic effects on the uk economy of an unanticipated fall of short term interest rates in the rest of the world are real house price inflation investment gdp and consumption growth peak after one year wages peak after two years cpi and gdp deflator inflation peak during the third year second a positive international supply shock makes the distribution of the components of the uk consumption deflator negatively skewed third in response to a domestic monetary shock we find no evidence of the exchange rate and liquidity puzzles and little evidence of the forward discount and price anomalies

commodity prices interest rates and the dollar this paper sheds light on recent fluctuations in commodity prices we investigate whether a decline in real interest rates and the us dollar contributes to higher commodity prices and whether commodity prices display overshooting behavior in response to changes in real interest rates we analyze the behavior of real prices of crude oil food metals and industrial raw materials the analysis is based on structural var models estimated on quarterly data over the period 1990q1 2007q4 our results suggest that commodity prices increase significantly in response to reductions in real interest rates moreover oil prices and prices of industrial raw materials tend to display overshooting behavior in response to such interest rate changes the evidence also suggests that a weaker dollar leads to higher commodity prices shocks to interest rates and the dollar are found to account for substantial shares of fluctuations in commodity prices

work education mismatch an endogenous theory of professionalization we model the education workforce pipeline and offer an endogenous theory of professionalization and ever higher degree attainment we introduce two mechanisms that act on the education enterprise causing the number of educated people to increase dramatically with relatively short term changes in the job market using our illustrative dynamic model we argue that the system is susceptible to small changes and the introduced self driving growth engines are adequate to over incentivize degree attainment we also show that the mechanisms magnify effects of short term recessions or technological changes and create long term waves of mismatch between workforce and jobs the implication of the theory is degree inflation magnified pressures on those with lower degrees underemployment and job market mismatch and inefficiency

monetary policy and global banking when central banks adjust interest rates the opportunity cost of lending in local currency changes but absent frictions there is no spillover effect to lending in other currencies however when equity capital is limited global banks must benchmark domestic and foreign lending opportunities we show that in equilibrium the marginal return on foreign lending is affected by the interest rate differential with lower domestic rates leading to an increase in local lending at the expense of a reduction in foreign lending we test our prediction in the context of changes in interest rates in six major currency areas

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

monetary policy shocks and foreign investment income evidence from a large bayesian var abstract this paper assesses the transmission of monetary policy in a large bayesian vector autoregression based on the approach proposed by banbura et al 2010 the paper analyzes the impact of monetary policy shocks in the united states and canada not only on a range of domestic aggregates trade flows and exchange rates but also foreign investment income the analysis provides three main results first a surprise monetary policy contraction has a statistically important impact on both gross and net foreign investment income flows in both countries against the background of growing foreign wealth and investment income this result provides preliminary evidence that foreign balance sheet channels might play an increasingly significant role for monetary transmission second the impact of monetary policy on foreign investment income flows differs considerably across asset categories and over time suggesting that the investment instruments and the currency denomination of a country s foreign assets and liabilities are potentially relevant for the way in which monetary policy affects the domestic economy finally the results support existing evidence on the effectiveness of large vector autoregressions and the bayesian shrinkage approach in eliminating price and exchange rate puzzles

are supply shocks important for real exchange rates a fresh view from the frequency domain abstract this paper re examines the role of supply shocks for real exchange rate fluctuations and contributes by exploiting insights from the frequency domain perspective in contrast to the existing literature our empirical findings point towards an important role played by supply productivity shocks in driving us real effective exchange rate fluctuations at low frequencies while real demand shocks matter mostly at high and medium frequencies in addition we propose an approach to structurally decompose the persistence of the real exchange rate and find that supply shocks explain up to half of its persistence

the impact of monetary policy on the exchange rate a high frequency exchange rate puzzle in emerging economies abstract this study investigates the impact of monetary policy shocks on the exchange rates of brazil mexico and chile we find that even a focus on 1 day exchange rate changes following policy events which reduces the potential for reverse causality considerably fails to lend support for the view that associates unexpected interest rate hikes with immediate appreciations this lack of empirical backing for the predictions of standard open economy models persists irrespective of whether we use the us dollar or effective exchange rates whether changes in the policy rate that were followed by exchange rate interventions are excluded whether contaminated events are dropped from the analysis or whether we allow for non linearities we argue that it is difficult to attribute this stronger version of the exchange rate puzzle to fiscal dominance as unexpected rate increases are not associated with increases in risk premia and similar results are obtained in the case of chile a country that has had the highest possible short term credit rating since 1995 and a debt gdp ratio below 10

are forign exchange intervention and monetary policy related and does it really matter the relationship between foreign exchange intervention and monetary policy underlies the question of whether sterilized interventions can affect the exchange rate in this article the author examines this relationship using data on u s foreign exchange interventions from 1985 to 1990 recently made publicly available she examines whether interventions could be viewed as signaling changes in future monetary policy variables the author also considers whether changes in monetary policy may induce interventions in an effort by central bankers to lean against the wind of exchange rate movements interestingly she finds evidence both that interventions help predict monetary policy variables and that monetary variables help predict interventions copyright 1995 by university of chicago press

twin deficit or twin divergence fiscal policy current account and real exchange rate in the u s abstract in spite of concerns about twin deficits fiscal and the current account deficits for the united states economy empirical evidence suggests that twin divergence is a more usual feature of the historical data i e when fiscal accounts worsen the current account improves and vice versa this paper empirically studies the effects of fiscal policy government budget deficit shocks on the current account and the real exchange rate during the flexible exchange rate regime period based on var vector auto regression models we identified exogenous fiscal policy shocks after controlling for business cycle effects on fiscal balances in contrast to the predictions of most theoretical models the u s results suggest that an expansionary fiscal policy shock or a government budget deficit shock improve the current account and depreciate the real exchange rate increases in private savings and declines in investment contribute to the current account improvement while a nominal exchange rate depreciation as opposed to a relative price level change is mainly responsible for the real exchange rate depreciation the twin divergence of fiscal balances and current account balances is also explained by the prevalence of output shocks i e output shocks more than fiscal shocks appear to drive the co movements of the current account and the fiscal balance

liquidity premia and interest rate parity abstract due to the us dollar s dominant role for international trade and finance risk free assets denominated in us currency not only offer a pecuniary return but also provide transaction services both nationally and internationally accordingly the responses of bilateral us dollar exchange rates to interest rate shocks should differ substantially with respect to the us or foreign origin of the shock we demonstrate this empirically and apply a model of liquidity premia on us treasuries originating from monetary policy implementation the liquidity premium leads to a modification of uncovered interest rate parity uip which enables the model to explain an appreciation of the dollar subsequent to an increase in us interest rates if foreign interest rates follow the us monetary policy rate

a long run structural macroeconometric model of the uk a new modelling strategy that provides a practical approach to incorporating long run structural relationships suggested by economic theory in an otherwise unrestricted var model is applied to construct a small quarterly macroeconometric model of the uk estimated over 1965q1 1999q4 in nine variables domestic and foreign outputs prices and interest rates oil prices the nominal effective exchange rate and real money balances the aim is to develop a model with a transparent and theoretically coherent foundation tests of restrictions on the long run relations of the model are presented the dynamic properties of the model are discussed and monetary policy shocks identified

is the unemployment inflation trade off still alive in the euro area and its member countries it seems so the unemployment inflation trade off can be interpreted as a proposition concerning the response of these two variables to aggregate demand shocks in this paper we study the possible presence of the trade off in the euro area and in a wide group of euroarea countries in the last 20 years i e since the start of emu we use the structural var methodology that allows the separation between supply and demand shocks our main finding is that the existence of a trade off is largely confirmed both at the euro area and at the national level nevertheless the size of the trade off measured at different horizons shows some heterogeneity among countries no less important when we augment the var model by introducing monetary policy in the context of an open economy we find that monetary policy shocks push inflation and unemployment in opposite directions in the currency area another interesting result concerns the evidence of a relatively flat relation between unemployment and inflation conditionally to monetary policy shocks

nominal shocks and real exchange rates evidence from two centuries abstract this paper employs structural vector autoregression methods to examine the contribution of real and nominal shocks to real exchange rate movements using two hundred and seventeen years of data from britain and the united states shocks are identified with long run restrictions the long time series makes possible an investigation of how the role of nominal shocks has evolved over time due to changes in the shock processes or to structural changes in the economy which might alter how a shock is transmitted to the real exchange rate the sample is split at 1913 which is the end of the classical gold standard period the last of the monetary regimes of the 19th century the earlier subsample 1795 1913 shows a much stronger role for nominal shocks in explaining real exchange rate movements than the later subsample 1914 2010 counterfactual analysis shows that the difference between the two periods is mainly due to the size of the nominal shocks rather than structural changes in the economy these findings are consistent with the view that the financial instability and frequent deflation of the 19th century had real economic effects