Risk, Monetary Policy and the Exchange Rate / Gianluca Benigno, Pierpaolo Benigno, Salvatore Nisticò.

Format:

Book

Author/Creator:

Benigno, Gianluca.

Contributor:

National Bureau of Economic Research.

Benigno, Pierpaolo.

Nisticò, Salvatore.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17133.

NBER working paper series no. w17133

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

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 coefficient in the UIP regression.

Notes:

Print version record

June 2011.