SOME EMPIRICAL-EVIDENCE ON THE EFFECTS OF SHOCKS TO MONETARY-POLICY ON EXCHANGE-RATES

This paper investigates the effects of shocks to U.S. monetary policy on exchange rates. We consider three measures of these shocks: orthogo nalized shocks to the federal funds rate, orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the Romer and R omer index of monetary policy. In sharp contrast to the literature, we find substantial evidence of a link between monetary policy and excha nge rates. Specifically, according to our results a contractionary sho ck to U.S. monetary policy leads to (i) persistent, significant apprec iations in U.S. nominal and real exchange rates and (ii) significant, persistent deviations hom uncovered interest rate parity in favor of U .S. interest rates.