Monetary policy surprises and exchange rate behavior

Central banks unexpectedly tightening policy rates often observe the exchange value of their currency depreciate, rather than appreciate as predicted by standard models. We document this for Fed and ECB days using event studies ask whether an information effect, where public attributes surprise to unobserved state economy, may explain abnormality. It turns out that many informational assumptions make a two-country New Keynesian model match behavior. To identify particular mechanism, we condition on multiple asset prices in study implications these. find there is heterogeneity dimension no with single regime can evidence. Further, even after conditioning possible effects driving longer term interest rates, appear be other drivers rates. Our results show existing models have long way go reconciling analysis model-based mechanisms pricing.