Permanent and temporary monetary policy shocks and the dynamics of exchange rates

Published: 29 November 2023| Version 1 | DOI: 10.17632/6yfvs3dswb.1
Pedro Pires Ribeiro,
, João Valle e Azevedo


This paper asks whether different types of nominal disturbances affect exchange rates differently and whether such distinction helps understanding the short-run and long-run relations between nominal rates and exchange rates, in a context where nominal disturbances are typically seen as important drivers of exchange rate movements. Our empirical exercise relies on monthly data for exchange rates, inflation, nominal interest rates and output from 1971 to 2019, considering the U.S. and another advanced economy among the following: Great Britain, Germany, France, Australia, Switzerland, Japan and the euro area. In sum, we find that a shock leading to a temporary increase in U.S. nominal interest rates leads to a temporary appreciation of the USD against the other currencies. In turn, a monetary policy shock leading to a permanent rise in nominal interest rates – e.g., one associated with a normalisation of monetary policy after a long period at the zero lower bound – results in a depreciation of the USD, in the short as well as over the long run that may contribute to higher (not lower) inflation also in the short run. The tables and figures of this paper present the results of the estimation of the VECM and the impulse response functions as well as the FEVD.


Steps to reproduce

This package comprises four different folders: (i) Data; (ii) Install JMulTi; (iii) Tables and Figures and (iv) Tables and Figures_Supplemental Material File. In the folder Data there are the excel files with the data used for the several countries explored in the paper. In the folder install JMulTi, the version of the JMulTi used in the paper is available. This is the version that should be used throughout this replication guide. Finally, in the folders Tables and Figures and Tables and Figures_Supplemental, there are multiple folders for the different tables and figures of the paper. Within each folder there are excel files with all the tables and figures as displayed in the paper as well as different folder for each of the different models that feed those tables and figures (US_UK model, for example) where the excel of output results from JMulTi are kept as well as a JMulTi project file. The excels with the figures and tables are directly linked to these output excels from JMulTi according to what is needed to build each figure or table. The goal of this replication guide is to guide the user into obtaining these output excel files as they are the key files with the results for the paper. If the goal of the user is to replicate a specific table or figure, it just has to replace the output excel files in each model folder and update those links in the excel file of the respective table or figure.


Banco de Portugal, Universidade Nova de Lisboa Nova School of Business and Economics, ISCTE-Instituto Universitario de Lisboa


Economics, International Economics


Fundação para a Ciência e a Tecnologia