Working Paper

The U. S. monetary policy regime, interest differentials and dollar exchange rate risk premia

Abstract: It is commonly believed that the Federal Reserve targeted money growth directly and allowed greater variation in interest rates during the October 1979-October 1982 period. Other things the same, this policy regime would be expected to increase the risk premium on the dollar exchange rate relative to a regime that attempted to reduce variations in the interest rate. We find that risk premia apparently did increase during the regime of M1 targeting. This implied that failure to recognize the effects of changes in Fed policy is a source of specification error in exchange rate models.

Keywords: Monetary policy;

Status: Published in Journal of International Money and Finance, March 1989, 8(1), pp. 137-45

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 1987

Number: 1987-009