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Exchange rates and monetary policy uncertainty

Mueller, Philippe, Tahbaz-Salehi, Alireza and Vedolin, Andrea (2016) Exchange rates and monetary policy uncertainty. Systemic Risk Centre Discussion Papers (54). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We also show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the U.S.; (ii) increase with uncertainty about monetary policy; and (iii) intensify when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as a compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2016 The Authors
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
Date Deposited: 12 Apr 2016 10:42
Last Modified: 17 Nov 2022 15:51
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/66043

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