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Risk, monetary policy and the exchange rate

Benigno, Gianluca, Benigno, Pierpaolo and Nisticò, Salvatore (2012) Risk, monetary policy and the exchange rate. In: Acemoglu, Daron and Woodford, Michael, (eds.) NBER Macroeconomics Annual 2011. NBER macroeconomics annual (26). University of Chicago Press, Chicago, US, pp. 247-309. ISBN 9780226002149

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In this research, we provide new empirical evidence on the importance of time-varying uncertainty for the exchange rate and the excess return in currency markets. Following an increase in monetary policy uncertainty, the dollar exchange rate appreciates in the medium run, while an increase in the volatility of productivity leads to a dollar depreciation. We propose a general-equilibrium theory of exchange rate determination based on the interaction between monetary policy and time-varying uncertainty aimed at understanding these regularities. In the model, the behaviour of the exchange rate following nominal and real volatility shocks is consistent with the empirical evidence. Furthermore we show that risk factors and interest-rate smoothing are important in accounting for the negative coeffcient in the UIP regression.

Item Type: Book Section
Official URL:
Additional Information: © 2012 National Bureau of Economic Research
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D5 - General Equilibrium and Disequilibrium
F - International Economics > F3 - International Finance
Date Deposited: 13 Feb 2012 16:48
Last Modified: 28 Oct 2021 23:04

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