تاثیر سیاست های پولی بر نرخ ارز:یک تناوب بالای معمای نرخ ارز در اقتصادهای در حال ظهور

This study investigates the impact of monetary policy shocks on the exchange rates of Brazil, Mexico and Chile. We find that even a focus on 1 day exchange rate changes following policy events – which reduces the potential for reverse causality considerably – fails to lend support for the view that associates unexpected interest rate hikes with immediate appreciations. This lack of empirical backing for the predictions of standard open economy models persists irrespective of whether we use the US Dollar or effective exchange rates, whether changes in the policy rate that were followed by exchange rate interventions are excluded, whether “contaminated” events are dropped from the analysis or whether we allow for non-linearities. We argue that it is difficult to attribute this stronger version of the exchange rate puzzle to fiscal dominance, as unexpected rate increases are not associated with increases in risk premia, and similar results are obtained in the case of Chile – a country that has had the highest possible short-term credit rating since 1995 and a debt/GDP ratio below 10%

The extent to which monetary factors determine the value of a currency has been one of the key questions of macroeconomics for a long time. While an extensive list of studies has addressed this question and the associated puzzles in the case of developed countries, the literature that looks at this issue in the context of emerging markets has been much more scant, in part because most emerging markets do not have a sufficiently long track record with a floating exchange rate regime. As the number of emerging economies that let the value of their currency be driven by market forces has increased, and the value of the currencies of these increasingly important players in the global economy has come to the forefront of the international policy debate, the need of a clearer understanding of the determinants of the value of their currencies has raised the necessity of such analysis. At the very least, some knowledge about the actual relationship between interest rate and exchange rate movements in emerging economies is required to guide model selection in the context of emerging markets and provide a clearer understanding of the transmission mechanisms that are at work. Conventional open economy models that combine an uncovered interest parity condition with rational expectations, along the lines of the seminal paper by Dornbusch (1976), would suggest that an unexpected monetary contraction leads to an immediate appreciation of the currency, so as to create the conditions for a subsequent depreciation at a rate that equals the interest rate differential. More generally, the association of interest rate hikes with currency appreciations is also a standard feature of many other workhorse models of international macro and, indeed, of macroeconomic textbooks. Identifying the effects of monetary policy shocks on exchange rates in the data however is not a trivial task if one takes proper account of the issue of endogeneity, i.e. the possibility that monetary policy actions constitute a reaction to concomitant changes in the exchange rate or foreign monetary policy conditions. Indeed, an important study by Zettelmeyer (2004) has argued that the frequent association of positive interest rate shocks with currency depreciations – which is a well known feature of the VAR literature (see for instance Grilli and Roubini (1995) and Hnatkovska et al. (2011)) – can be attributed to this problem of reverse causality.2 In order to control for this possibility, this paper follows the event study approach taken by Zettelmeyer, to study the impact of monetary policy committee decisions on the exchange rates of the Brazilian Real, the Mexican and the Chilean Peso using daily variations.3 The main advantage of the event based methodology is that it allows us to properly control for the fact that the monetary authorities of these emerging economies have frequently intervened in the foreign exchange markets – something that has been ignored in earlier developing country studies. Furthermore, a second advantage of our methodology is that our results are not model dependent and, in particular, do not rely on VAR based identification of monetary policy shocks and the strong information assumptions that underlie it. It is important to remember that VAR based procedures require the strong assumption that the information set of the central bank is fully described by the variables contained in the system. The main caveat of our choice is that we are unable to draw any conclusion about the dynamic response of the exchange rate to monetary policy shocks. The focus on the cases of Brazil, Mexico and Chile allows us to compare the effects of monetary policy in emerging economies that have established floating exchange rate regimes, but have had markedly different levels of gross indebtedness. According to the de facto classification of Reinhart and Rogoff (2004) – and later updates of it by the IMF, the first 2 of these countries were the only ones among the 5 largest emerging economies of the world that have operated under a floating exchange rate regime in an uninterrupted fashion for more than a decade. 4 The contribution of our study of 238 monetary policy events is to show that, contrary to the results that were obtained for a number of developed economies, 5 the detailed analysis of the events that surrounded the (pre-scheduled) monetary policy committee meetings that took place in Brazil, Mexico and Chile between January 2003 and May 2011 fails to reverse the exchange rate puzzle, i.e. to provide any evidence that interest rate increases are associated with exchange rate appreciations on impact. Indeed, this contradiction of the textbook relation is very robust and holds irrespective of whether interest rate changes are anticipated or not or of whether changes in the policy rate that were followed by exchange rate intervention are excluded from the sample. Moreover, it persists even if we allow for the possibility of a non-linear relation between interest rates and exchange rates. If anything, we find that the exchange rate depreciates following monetary policy contractions, irrespective of whether we use changes in the US Dollar rate or the variation against a basket of currencies. Second, we also show that the response of the exchange rate to domestic and to US interest rate shocks is clearly not symmetric. 6 While responses to domestic rate changes seem to defy the conventional wisdom, the responses to US rate changes on FOMC meeting days do seem to be in accordance with it. Third, we argue that this puzzling finding cannot easily be attributed to fiscal dominance, 7 as unexpected rate increases are not associated with increases in risk premia in any of these countries and the results hold not only in the case of Brazil or Mexico, but also in the case of Chile - a country that has had the highest possible short-term sovereign credit rating since 1995 and a debt/GDP ratio below 10%. The empirical failure of the conventional view of the exchange rate in these emerging markets represents a higher frequency and more robust version of the exchange rate puzzle that is typical of the VAR literature. While we are able to point out clear evidence of foreign exchange market inefficiencies in the cases of Brazil and Mexico, the asymmetric response to domestic and to US based monetary policy shocks seems to indicate that these currency market inefficiencies alone are probably not sufficient to explain the puzzle. The weakness of the domestic interest – exchange rate link also has important monetary policy implications, so that finding possible solutions to this puzzle should be placed high on the research agenda. Outline. This paper proceeds as follows. Section 2 explains the country selection and provides some background information on their policy frameworks. In Section 3, a preliminary scatter plot analysis is presented, while Section 4 explains the estimates of the effects of domestic and foreign monetary policy shocks on the exchange rates using the baseline model. Section 5 shows evidence that very simple currency trading strategies actually deliver significant excess returns, which can be taken as an indication of market inefficiencies. A comprehensive classification of the policy events according to their inputted degree of exogeneity and the re-estimation of the specifications of Section 4 is shown in Section 6, where we analyze subsamples according to the degrees of exogeneity of the observations. As a robustness check, the estimations are repeated based on the variations against a weighted basket of global currencies. The robustness section also shows that domestic monetary policy shocks do not seem to lead to significant changes in expectations about the future rate of depreciation. Section 7 explores some conjectures about the causes of the surprising results, noting that many studies have taken output as given. It also discusses the related literature. The paper closes with some concluding remarks, indicating directions for further research.

The failure to find the association that several authors have found in some developed countries leads us to conclude that in the context of emerging economies there is no indication that the exchange rate puzzle that is characteristic of the VAR literature is due to reverse causality or even fiscal dominance. When analyzing the time variation of β by using rolling window estimations we also did not find any evidence that the point estimates or significance of the coefficient changed in a noticeable way after the global financial crisis. In face of this, what we have in these countries is clearly a stronger version of the exchange rate puzzle. It is apparent that the link between interest and exchange rate variations seems to be much more elusive than what the current generation of open economy models would suggest. Addressing this apparent failure of the exchange rate predictions of the standard interest parity cum rational expectations paradigm would certainly enhance, among others, the understanding of international capital flows. While recently some progress has been made in this respect, our view is that some papers have put far too great weight on fiscal dominance – without presenting the necessary evidence that interest rate hikes are associated with increases in risk premia or inflation. The output effect of interest rate changes may have received too little weight in environments in which credit constraints tend to be important. The weakness of the domestic interest – exchange rate link also has implications for optimal monetary policy. What is clear is that finding possible solutions to the puzzle that was presented here should be placed high on the research agenda