Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273333 
Year of Publication: 
2023
Series/Report no.: 
DIW Discussion Papers No. 2037
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
We examine the causal relationship between US monetary policy shocks, exchange rates and currency excess returns for a sample of eight advanced countries over the period 1980M1 to 2022M11. We find that the dynamics of the US dollar exchange rate is the main driver of currency excess returns. The exchange rate is significantly affected by US monetary policy shocks, where the persistence of this shock is important, as well as by an external shock. This external shock is strongly related to global risk aversion and the convenience yield that investors are willing to pay for holding US Dollar assets. A significant part of the response of excess currency returns is also expected, suggesting a violation of the UIP. Focusing only on the post-crisis period, the impact of both the external shock and the inflation targeting shock on exchange rates and currency excess returns disappears in the cross-section.
Subjects: 
exchange rates
excess currency returns
uncovered interest parity
convenience yield
global financial cycle
global risk
monetary policy
JEL: 
E52
C32
E43
F31
G15
F41
Document Type: 
Working Paper

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