English, Article, Journal or magazine article edition: Monetary Policy Rules and Exchange Rates:A Structural VAR Identified by No Arbitrage Sen Dong

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Bookmark: http://trove.nla.gov.au/version/30373
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Monetary Policy Rules and Exchange Rates:A Structural VAR Identified by No Arbitrage
Author
  • Sen Dong
Physical Description
  • preprint
Notes
  • Expected exchange rate changes are determined by interest rate differentials across countries and risk premia, while unexpected changes are driven by innovations to macroeconomic variables, which are amplified by time-varying market prices of risk. In a model where short rates respond to the output gap and inflation in each country, I identify macro and monetary policy risk premia by specifying no-arbitrage dynamics of each country's term structure of interest rates and the exchange rate. Estimating the model with US/​German data, I find that the correlation between the model-implied exchange rate changes and the data is over 60%. The model implies a countercyclical foreign exchange risk premium with macro risk premia playing an important role in matching the deviations from Uncovered Interest Rate Parity. I find that the output gap and inflation drive about 70% of the variance of forecasting the conditional mean of exchange rate changes
  • exchange rate, monetary policy,term structure, no arbitrage
  • RePEc:red:sed006:875
Language
  • English
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