Template-type: ReDIF-Paper 1.0
Author-Name: John C. Bluedorn
Author-Email: john.bluedorn@economics.ox.ac.uk
Author-Workplace-Name: Nuffield College, Oxford University
Author-Workplace-Homepage: http://www.nuffield.ox.ac.uk/college/
Author-Name: Christopher Bowdler
Author-Email: christopher.bowdler@economics.ox.ac.uk
Author-Workplace-Name: Nuffield College, Oxford University
Author-Workplace-Homepage: http://www.nuffield.ox.ac.uk/college/
Title: Monetary Policy and Exchange Rate Dynamics: New Evidence from the Narrative
Approach to Shock Identification
Abstract: We argue that endogenous and anticipated movements in
interest rates lead to underestimates of the speed and magnitude of
the exchange rate response to monetary policy.  Employing the Romer 
and Romer (2004) exogenous monetary policy shock measure, we find that
the effect of a one percentage point increase in the U.S. interest rate 
is up to twice as large and 3 times as fast as that obtained using the 
actual federal funds rate to identify monetary shocks.  Moreover, new 
evidence from open economy VARs emphasises the adjustment role of the 
exchange rate.  U.S. prices and output respond almost twice as quickly 
as they do in a closed economy VAR using the Romer and Romber shock measure.  
There is also evidence of stronger international transmission of U.S. 
monetary shocks.  Overall, the estimated response speeds and magnitudes are 
more easily reconciled with existing models than previous empirical work. 
Classification-JEL: E52, F31, F41
Keywords: monetary policy shocks, exchange rate dynamics, open economy VARs
Length: 59 pages
Creation-Date: 2005-08-01
Number: 2005-W18
File-URL: http://www.nuffield.ox.ac.uk/economics/papers/2005/w18/RRFX.03.08.2005.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:0518