Unanticipated Shocks to the Fed and Exchange Rate Market Pressures

Abstract

We analyze the impact of different unanticipated monetary policy shocks in the United States on other countries’ exchange rate market pressure index. Using the local projection method, we estimate a quarterly panel vector autoregressive model for 38 advanced and developing economies for 1997–2018 and calculate cumulative impulse response functions. We find that forward guidance shocks and the central bank information content of monetary policy are more important than conventional monetary policy shocks in explaining the increase in this indicator. When examining the exchange rate market pressure index in developing economies, its increasing response is more pronounced in the case of the unanticipated monetary policy shock series. These findings are important for determining how policymakers could adopt macroprudential regulations to dissociate their monetary and exchange rate policies from unanticipated monetary policy shocks in the United States.