Please note that Martin Eichenbaum from Northwestern University will be the speaker of the Research Seminar in Economics. He will present his research paper "Monetary Policy and the Predictability of Nominal Exchange Rates" which he wrote jointly with B. Johannsen and S. Rebelo on Thursday, April 27, 12:15-1:45 pm at Henry Ford Bau, Lecture Hall B, Garystraße 35, Berlin-Dahlem.

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 observations. Our preferred model is also consistent with other key observations about the volatility and persistence of real exchange rates, as well as the fact that standard tests of uncovered interest rate parity reject that hypothesis.

For further information about the Research Seminar in Economics and its program, please click here.