Monetary policy surprises and exchange rate behavior

Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. Refet Gürkaynak discusses Fed and ECB policy days using event studies and asks whether an information effect, where the public attributes the policy surprise to an unobserved state of the economy, may explain the abnormality.

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Image courtesy of interviewee

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