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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 35, No. 4, pp.425-444
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2022
Received 21 Jul 2022 Revised 30 Aug 2022 Accepted 02 Sep 2022
DOI: https://doi.org/10.22904/sje.2022.35.4.004

Revisiting the exchange rate dynamics at the US zero lower bound

Jihye Ahn
Jihye Ahn, BK21FOUR, Department of Economics, Seoul National University, 1, Gwankak-ro, Gwanak-gu, Seoul, South Korea jihyeahn@snu.ac.kr

JEL Classification: E52; E58; F31; F41

Abstract

This study revisits the dynamics of dollar/euro exchange rate in response to the US monetary policy shock at the zero lower bound (ZLB) including the COVID-19 pandemic. The key findings are as follows. First, the exchange rate behavior indicates Dornbusch (1976)’s overshooting hypothesis at the states classified as beginning and ending of the ZLB. Second, the revived ZLB induced by the COVID-19 pandemic has a larger impact on the exchange rate than that induced by the global financial crisis. Third, the responses of the exchange rates demonstrate the uncovered interest rate parity and the overshooting.

Keywords:

Exchange rate overshooting, Shadow federal funds rate, Zero lower bound, COVID-19 pandemic, Time-varying VAR, Uncovered interest rate parity

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