The effects of monetary policy shocks on exchange rates: A structural vector error correction model approach

Abstract

This paper investigates the effects of shocks to US monetary policy on the dollar–yen exchange rate, using structural Vector error correction model (VECM) methods with long-run restrictions. We compare our estimates of the impulse responses with those based on levels Vector autoregression (VAR) with standard recursive order restrictions. The empirical results based on the long-run restrictions are found to be more consistent with standard models of exchange rate determination than the results based on the recursive order restrictions. J. Japanese Int. Economies 18 (1) (2004) 99–114.