Discussion paper

DP11918 Monetary policy's rising FX impact in the era of ultra-low rates

We show that the FX impact of monetary policy has been growing significantly. We use a high-frequency event study of the joint response of fixed income instruments and exchange rates to monetary policy news from seven major central banks spanning 2004-2015. News affecting short maturity bonds have the strongest impact, highlighting the relevance of communication regarding the path of future policy. The FX impact of monetary policy is state-dependent and is stronger the lower is the level of interest rates. A greater adjustment burden falls onto the exchange rate, as rates are increasingly constrained by the effective lower bound.

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Citation

Schrimpf, A, J Kearns and M Ferrari (2017), ‘DP11918 Monetary policy's rising FX impact in the era of ultra-low rates‘, CEPR Discussion Paper No. 11918. CEPR Press, Paris & London. https://cepr.org/publications/dp11918