Exchange Rates and Uncovered Interest Diﬀerentials: The Role of Permanent Monetary Shocks / Stephanie Schmitt-Grohé, Martín Uribe.

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Schmitt-Grohé, Stephanie

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25380.Publication details: Cambridge, Mass. National Bureau of Economic Research 2018.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper estimates an empirical model of exchange rates and uncovered interest rate differentials with permanent U.S. monetary policy shocks. Using post-Bretton-Woods data from the United States, the United Kingdom, Japan, and Canada, it reports two main findings: First, monetary shocks that increase the U.S. nominal interest rate and inflation in the long run depreciate the dollar in nominal and real terms in the short run. Second, permanent increases in the U.S. interest rate cause short-run deviations from uncovered interest-rate parity against U.S. assets. The signs of these effects are opposite to those reported in the related literature for transitory monetary policy shocks. The estimated responses to transitory and permanent monetary shocks are shown to be qualitatively consistent with the predictions of a new Keynesian model of the open economy with portfolio adjustment costs.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w25380 (Browse shelf(Opens below))	Not For Loan

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December 2018.

This paper estimates an empirical model of exchange rates and uncovered interest rate differentials with permanent U.S. monetary policy shocks. Using post-Bretton-Woods data from the United States, the United Kingdom, Japan, and Canada, it reports two main findings: First, monetary shocks that increase the U.S. nominal interest rate and inflation in the long run depreciate the dollar in nominal and real terms in the short run. Second, permanent increases in the U.S. interest rate cause short-run deviations from uncovered interest-rate parity against U.S. assets. The signs of these effects are opposite to those reported in the related literature for transitory monetary policy shocks. The estimated responses to transitory and permanent monetary shocks are shown to be qualitatively consistent with the predictions of a new Keynesian model of the open economy with portfolio adjustment costs.