COVID-19 and Exchange Rates: Spillover Effects of U.S. Monetary Policy.

Area of Science:

• International Finance
• Macroeconomics
• Monetary Policy Analysis

Background:

• The global economic landscape is significantly influenced by United States monetary policy.
• The Coronavirus Disease 2019 (COVID-19) pandemic introduced unprecedented economic shocks and altered policy transmission mechanisms.
• Understanding cross-border economic spillovers is crucial for global financial stability.

Purpose of the Study:

• To investigate the spillover effects of United States monetary policy on exchange rates.
• To compare these effects during the pre-Coronavirus Disease 2019 (COVID-19) period (2019) versus the COVID-19 period (2020).
• To analyze the differential impact on emerging markets and advanced economies.

Main Methods:

• Employed a structural vector autoregression (SVAR) model.
• Utilized year-on-year changes in weekly economic activity, exchange rates, and policy rates.
• Analyzed data for 11 emerging markets and 12 advanced economies.

Main Results:

• Evidence of United States monetary policy spillover effects on exchange rates was found for several countries in the pre-COVID-19 period.
• During the COVID-19 period, these spillover effects were observed only in specific countries.
• The reduced effectiveness during the pandemic is attributed to the disease outbreak channel.

Conclusions:

• United States monetary policy spillovers on exchange rates are context-dependent and can be altered by global crises like the COVID-19 pandemic.
• Effective pandemic control measures may help buffer adverse economic consequences and stabilize exchange rates.
• The findings underscore the importance of considering disease-specific channels in international monetary policy transmission.