Measuring the impact of monetary policy on the lira exchange rates

Abstract

Measuring the impact of monetary policy on the exchange rate is complicated due to the simultaneous response of monetary policy to the exchange rate and the possibility that both variables respond to other omitted variables. Ignoring these problems may lead to biased results. Given the shortcomings of commonly-used identiÖcation techniques, this paper uses an identiÖcation method based on the heteroscedasticity in the high-frequency data. This methodology which aims to identify the exchange rate response to monetary policy is based on the increase in the variance of the policy shock on monetary policy committee meeting dates. IdentiÖcation through heteroscedasticity gives more accurate estimates and the results of this paper provide a cross-check for previous Öndings in the literature. The results suggest that while statistically there exist some bias in previous estimates, qualitatively the conclusion drawn by the previous literature, that the e§ect of monetary policy on the lira exchange rates is small, is veriÖed.