If Exchange Rates Are Random Walks, Then Almost Everything We Say About Monetary Policy Is Wrong

摘要

The key question asked of standard monetary models used for policy analysis is: how do changes in short-term interest rates affect the economy? The standard answer is that such policy changes affect the economy by changing the means of macroeconomic aggregates while having no effect on their conditional variances. Unfortunately, the data on exchange rates imply nearly the opposite. Fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and almost no changes in conditional means. With regard to monetary policy analysis, this means that standard monetary models capture nothing of what is going on in the data. Therefore, almost everything we say about monetary policy, based on these models, is wrong.