Simon Lloyd (Bank of England) - Surprising FX: (Towards) a Global Database for the Analysis of Monetary Policy Transmission

BOFIT-seminaarit

BOFIT Seminar - Simon Lloyd (Bank of England) - Surprising FX: (Towards) a Global Database for the Analysis of Monetary Policy Transmission

Co-authors: Michele Castegini (EUI) and Giancarlo Corsetti (EUI)

Abstract
The identification of monetary policy shocks has long relied on high-frequency surprises extracted from futures and swap markets (Kuttner, 2001; Gurkaynak et al, 2005; Gertler and Karadi, 2015). This approach has proven invaluable in advanced economies (AEs) since the 1990s, where deep and liquid derivatives markets exist. However, the reliance on interest rate futures or overnight index swaps (OIS) constrains the extension of this identification strategy to emerging markets (EMs), where such markets are shallower and, in some cases, have only come into existence relatively recently.

Exchange rates offer a promising alternative. Spot foreign exchange (FX) markets are highly liquid (for EMs typically vis-a-vis the U.S. dollar), trade continuously, and have long historical coverage across a wide set of economies. Moreover, exchange rates reflect, to some extent, expectations of future monetary policy, and---when measured in narrow windows around policy announcements---can plausibly be treated as exogenous to contemporaneous macroeconomic news. This project explores whether FX can serve as a systematic high-frequency proxy for monetary policy surprises, thereby expanding the scope of monetary transmission analysis across advanced and emerging economies.

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