Monetary shocks, the exchange rate, and the trade balance

This paper investigates the response of the exchange rate and the trade bal ance to monetary policy innovations for the US economy during the period 19 73:01-1993:12. The empirical findings indicate that contractionary monetary policy shocks lead to transitory appreciations of the real and the nominal exchange rate. Exchange rate appreciations that are caused by a temporary contractionary shock to monetary policy are correlated with a short-lived i mprovement in the trade balance which is then followed by a deterioration, giving support to the J-curve hypothesis. (C) 1999 Elsevier Science Ltd. Al l rights reserved.