Working Paper: CEPR ID: DP14034
Authors: Vania Stavrakeva; Jenny Tang
Abstract: Conventional wisdom holds that lowering a home country’s interest rate relativeto another’s will depreciate the domestic currency. We document that USmonetary policy easings actually had the opposite effect during the Great Recession.We attribute this effect to calendar-based forward guidance that signaledeconomic weakness which resulted in a flight-to-safety effect and lower expectedinflation in the United States. Our results imply that accusations that the FederalReserve engaged in a “competitive devaluation” over the Great Recession wereunfounded.
Keywords: No keywords provided
JEL Codes: E52; F31; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy easings during the Great Recession (E52) | dollar appreciation against a basket of currencies (F31) |
| expansionary monetary policy shocks (E39) | stronger dollar (F31) |
| surprise interest rate cuts (E43) | lower expected future excess returns (G17) |
| lower expected future excess returns (G17) | stronger dollar (F31) |
| lower expected future inflation in the US relative to other countries (E31) | stronger dollar (F31) |
| signaling effect of monetary policy (E52) | flight-to-safety effect (E44) |
| downward revisions in future US GDP growth expectations (E20) | increased risk aversion among investors (G41) |