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Research Details

Monetary Policy and the Predictability of Nominal Exchange Rates

Abstract

This paper documents two facts about the behavior of floating exchange rates in countries where monetary policy follows a Taylor-type rule. First, the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years. This negative correlation is stronger the longer is the horizon. Second, for most countries, the real exchange rate is virtually uncorrelated with future inflation rates both in the short and in the long run. We develop a class of models that can account for these and other key observations about real and nominal exchange rates.

Type

Working Paper

Author(s)

Sergio Rebelo, Martin S. Eichenbaum

Date Published

2017

Citations

Rebelo, Sergio, and Martin S. Eichenbaum. 2017. Monetary Policy and the Predictability of Nominal Exchange Rates.

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