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Monetary Policy Surprises and Exchange Rate Behavior

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  • Refet S. Gürkaynak
  • A. Hakan Kara
  • Burçin Kısacıkoğlu
  • Sang Seok Lee
Abstract
Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB policy days using event-studies and ask whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy that the central bank is signaling by its policy may explain the abnormality. It turns out that many informational assumptions make a standard two-country New Keynesian model match this behavior. To identify the particular mechanism, we condition on multiple asset prices in the event-study and model implications for these. We find that there is heterogeneity in this dimension in the event-study and no model with a single regime can match the evidence. Further, even after conditioning on possible information effects driving longer term interest rates, there appear to be other drivers of exchange rates. Our results show that existing models have a long way to go in reconciling event-study analysis with model-based mechanisms of asset pricing.

Suggested Citation

  • Refet S. Gürkaynak & A. Hakan Kara & Burçin Kısacıkoğlu & Sang Seok Lee, 2020. "Monetary Policy Surprises and Exchange Rate Behavior," NBER Working Papers 27819, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27819
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    Cited by:

    1. Gürkaynak, Refet S. & Kısacıkoğlu, Burçin & Lee, Sang Seok, 2022. "Exchange rate and inflation under weak monetary policy: Turkey verifies theory," CFS Working Paper Series 679, Center for Financial Studies (CFS).
    2. Miranda-Agrippino, Silvia & Nenova, Tsvetelina, 2022. "A tale of two global monetary policies," Journal of International Economics, Elsevier, vol. 136(C).
    3. Denis Gorea & Oleksiy Kryvtsov & Marianna Kudlyak, 2022. "House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data," Working Paper Series 2022-16, Federal Reserve Bank of San Francisco.
    4. Santiago Camara, 2021. "Spillovers of US Interest Rates: Monetary Policy & Information Effects," Papers 2111.08631, arXiv.org, revised Feb 2023.
    5. Christophe Blot & Jérôme Creel, 2023. "Soft or strong: the art of monetary tightening," SciencePo Working papers Main hal-03954545, HAL.
    6. Miranda-Agrippino, Silvia & Ricco, Giovanni, 2023. "Identification with External Instruments in Structural VARs," Journal of Monetary Economics, Elsevier, vol. 135(C), pages 1-19.
    7. Iwanicz-Drozdowska, Małgorzata & Rogowicz, Karol & Kurowski, Łukasz & Smaga, Paweł, 2021. "Two decades of contagion effect on stock markets: Which events are more contagious?," Journal of Financial Stability, Elsevier, vol. 55(C).
    8. Refet Gürkaynak & Hati̇ce Gökçe Karasoy‐Can & Sang Seok Lee, 2022. "Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect," Journal of Finance, American Finance Association, vol. 77(4), pages 2375-2421, August.
    9. Jarociński, Marek, 2022. "Central bank information effects and transatlantic spillovers," Journal of International Economics, Elsevier, vol. 139(C).
    10. Oliver Holtemöller & Alexander Kriwoluzky & Boreum Kwak, 2020. "Exchange Rates and the Information Channel of Monetary Policy," Discussion Papers of DIW Berlin 1906, DIW Berlin, German Institute for Economic Research.
    11. Oliver Holtemöller & Alexander Kriwoluzky & Boreum Kwak, 2024. "Is There an Information Channel of Monetary Policy?," Discussion Papers of DIW Berlin 2084, DIW Berlin, German Institute for Economic Research.
    12. Enrique Alberola-Ila & Carlos Cantú & Paolo Cavallino & Nikola Mirkov, 2021. "Fiscal regimes and the exchange rate," BIS Working Papers 950, Bank for International Settlements.
    13. Julien Pinter & Evzen Kocenda, 2021. "Media Treatment of Monetary Policy Surprises and Their Impact on Firms' and Consumers' Expectations," Working Papers IES 2021/30, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2021.
    14. Donato Masciandaro & Davide Romelli & Stefano Ugolini, 2023. "Fiscal Dominance, Monetary Policy and Exchange Rates: Lessons from Early-Modern Venice," BAFFI CAREFIN Working Papers 23205, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    15. Donato Masciandaro & Davide Romelli & Gaia Rubera, 2021. "Monetary policy and financial markets: evidence from Twitter traffic," BAFFI CAREFIN Working Papers 21160, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    16. Kerstin Bernoth & Helmut Herwartz & Lasse Trienens, 2023. "The Impacts of Global Risk and US Monetary Policy on US Dollar Exchange Rates and Excess Currency Returns," Discussion Papers of DIW Berlin 2037, DIW Berlin, German Institute for Economic Research.
    17. Hiroyuki Kubota & Mototsugu Shintani, 2020. "High-frequency Identification of Unconventional Monetary Policy Shocks in Japan," CARF F-Series CARF-F-502, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    18. Gorea, Denis & Kryvtsov, Oleksiy & Kudlyak, Marianna, 2023. "House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data," CEPR Discussion Papers 18545, C.E.P.R. Discussion Papers.
    19. Christopher S. Sutherland, 2023. "Forward guidance and expectation formation: A narrative approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(2), pages 222-241, March.
    20. Boragan Aruoba & Andrés Fernández & Daniel Guzmán & Ernesto Pastén & Felipe Saffie, 2021. "Monetary Policy Surprises in Chile: Measurement & Real Effects," Working Papers Central Bank of Chile 921, Central Bank of Chile.
    21. Karau, Sören, 2021. "Monetary policy and Bitcoin," Discussion Papers 41/2021, Deutsche Bundesbank.
    22. Santiago Camara, 2021. "US Spillovers of US Monetary Policy: Information effects & Financial Flows," Papers 2108.01026, arXiv.org, revised May 2024.
    23. Xu Zhang, 2021. "A New Measure of Monetary Policy Shocks," Staff Working Papers 21-29, Bank of Canada.
    24. Denis Gorea & Oleksiy Kryvtsov & Marianna Kudlyak, 2022. "House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data," Staff Working Papers 22-39, Bank of Canada.

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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