Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/224786
Authors: 
Gürkaynak, Refet S.
Kara, Ali Hakan
Kısacıkoğlu, Burçin
Lee, Sang Seok
Year of Publication: 
2020
Series/Report no.: 
CFS Working Paper Series 642
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.
Subjects: 
exchange rate response to monetary policy
central bank information effect
open economy macro-finance modeling
JEL: 
E43
E44
E52
E58
G14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.