An empirical investigation on the liquidity effects of monetary policy shocks on exchange rates

Abstract

This paper examines recent work on the identification of monetary policy disturbances and
the effect on the interest rates and exchange rate. A method of identifying monetary policy
using non borrowed reserves is proposed. Under this specification, policy has strong persistent
liquidity effects in interest and exchange rates. The fluctuation of the liquidity level impacts the
level of the interest rates and spills over to the asset prices and to the foreign exchange market.