Monetary shocks, the exchange rate, and the trade balance |
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Authors: | Faik Koray W Douglas McMillin |
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Institution: | Department of Economics, Louisiana State University, Baton Rouge, LA 70803-6306, USA |
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Abstract: | This paper investigates the response of the exchange rate and the trade balance to monetary policy innovations for the US economy during the period 1973:01–1993:12. The empirical findings indicate that contractionary monetary policy shocks lead to transitory appreciations of the real and the nominal exchange rate. Exchange rate appreciations that are caused by a temporary contractionary shock to monetary policy are correlated with a short-lived improvement in the trade balance which is then followed by a deterioration, giving support to the J-curve hypothesis. |
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Keywords: | JEL classification codes: F4 E5 |
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