QE and exchange rates

The portfolio rebalancing channel

In this speech Benoît Cœuré confirms that portfolio rebalancing is a major transmission channel of central bank asset purchase programmes and provides support to theories of exchange rate determination in imperfect financial markets. But, he argues, unlike private portfolio rebalancing QE programs can be anticipated by investors and as a result such programmes have the potential of breaking the link between future expected short-term rates and the exchange rate.

Monetary policy, exchange rates and capital flows
By: Benoît Cœuré – ECB

We find that QE has a small but significant effect on a country’s current account balance when capital mobility is low, but this effect declines to near zero when capital mobility is high. We also find that the spillovers of unconventional policies show up in current account balances of all other countries, with relatively stronger effects in countries that are more integrated with global financial markets.

Unconventional Monetary and Exchange Rate Policies
Authors: Gagnon, Joseph E., Tamim Bayoumi, Juan M. Londono, Christian Saborowski, Horacio Sapriza
From: Federal Reserve Board

The Swiss Franc example

Aregger and Leutert apply a synthetic control approach in order to evaluate the effect of unconventional monetary policies on the EUR/CHF exchange rate during the 2009-2011 period.

Policy Evaluation by the Synthetic Control Approach: The Case of the Swiss Franc
Authors: Nicole Aregger, Jessica Leutert
From:University of Bern – University of Lausanne