Monetary policy and exchange-rate interaction

Research from Norges Bank shows a high degree of interaction between monetary policy and exchange rates.

The authors find that exchange-rate shocks that depreciates currencies by 1%, raise central banks' benchmark rates by 20-40 basis points within three months.

Also, a contractionary monetary-policy shock that raises central banks' benchmark rates by one percentage point appreciates the exchange rate by 2.5%-4% before the exchange rate gradually depreciates back to its previous level.


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