Unconventional Monetary Policy and International Risk Premia

• Published in: Journal of money, credit and banking Vol. 50; no. 8; pp. 1827 - 1850
• Main Authors: ROGERS, JOHN H., SCOTTI, CHIARA, WRIGHT, JONATHAN H.
• Format: Journal Article
• Language: English
• Published: Columbus Wiley Periodicals, Inc 01-12-2018; Ohio State University Press
• Subjects: E58; Economic models; external instruments; federal reserve; Foreign exchange; Foreign exchange rates; Interest rates; Monetary policy; monetary policy shocks; Risk assessment; Risk premiums
• ISSN: 0022-2879; 1538-4616
• DOI: 10.1111/jmcb.12511

We assess the relationship between monetary policy, foreign exchange risk premia, and term premia including the period at the zero lower bound (ZLB). We estimate a structural vector autoregression including U.S. and foreign interest rates and exchange rates and identify monetary policy shocks through a method that uses high-frequency monetary policy surprises as the external instrument that achieves identification without using implausible restrictions. We split out effects of different types of monetary policy surprises that apply at the ZLB, including forward guidance and asset purchases. This allows us to measure the effects of policy shocks on expectations, and hence risk premia.