Monetary Policy and the Predictability of Nominal Exchange Rates

@inproceedings{Eichenbaum2017MonetaryPA,
  title={Monetary Policy and the Predictability of Nominal Exchange Rates},
  author={Martin Eichenbaum and Benjamin Johannsen and Sergio Rebelo},
  year={2017}
}
This paper studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about countries with floating exchange rates where monetary policy controls inflation using a short-term interest rate. First, the current real exchange rate predicts future changes in the nominal exchange rate. Out-of-sample forecasts based on the real exchange rate outperform random walk… CONTINUE READING

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