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Exchange rate undershooting: Evidence and Theory
We run local projections to estimate the effect of US monetary policy shocks on the dollar. We find that monetary contractions appreciate the dollar and establish two results. First, the spot exchange rate undershoots: the appreciation is smaller on impact than in the longer run. Second, forward exchange rates also appreciate on impact, but their response is flat across tenors. Next, we develop and estimate a New Keynesian model with information frictions. In the model, investors do not observe the natural rate of interest directly. As a result, they learn only over time whether an interest rate surprise represents a monetary contraction. The model accurately predicts the joint dynamics of spot and forward exchange rates following a monetary contraction.
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Date:
14 November 2019, 13:00
Venue:
Manor Road Building, Manor Road OX1 3UQ
Venue Details:
Seminar Room C
Speaker:
Gernot Mueller (University of Tuebingen)
Organising department:
Department of Economics
Part of:
Department of Economics Seminar
Booking required?:
Not required
Audience:
Members of the University only
Editor:
Melis Clark
