Monetary policy responses to the exchange rate: Empirical evidence from the ECB

Demir, Ishak (2014) Monetary policy responses to the exchange rate: Empirical evidence from the ECB. Economic Modelling, 39 (C). pp. 63-70. ISSN 0264-9993


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The exchange rate is an important part of the transmission mechanism in the determination of monetary policy because movements in the exchange rate have significant effect on the macroeconomy. It can be difficult to measure the reaction of monetary policy to the movements of the exchange rate, due to the simultaneous response of monetary policy to the exchange rate and the possibility that both variables respond to several other variables. This study addresses these problems by using an identification method based on the heteroscedasticity in the high-frequency data. The results in this paper suggest that the ECB systematically responds to exchange rate movements but that quantitative effects are small. Such a significant but small reaction coefficient seems consistent with the hypothesis that the central banks do not target the fluctuations in the exchange rate but consider them only to the extent they impact on the expected inflation and output path.

Keywords:Monetary policy, Exchange rates, Identification through heteroscedasticity, European Central Bank, NotOAChecked
Subjects:N Business and Administrative studies > N300 Finance
L Social studies > L100 Economics
L Social studies > L113 Economic Policy
L Social studies > L130 Macroeconomics
Divisions:College of Social Science
Lincoln International Business School
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ID Code:28084
Deposited On:02 Aug 2017 15:05

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