School Brown Bag: Wenjao Hu

This is an in-person event.

Speaker:  Wenjao Ho

Title:  Central bank independence and the exchange rate disconnect puzzle: the US dollar/UK Pound Exchange Rate

Abstract:  The disconnection between macroeconomic fundamentals and exchange rates- referred to as “exchange rate disconnect puzzle” - has troubled many researchers in international macroeconomics. To explore how central bank independence(CBI) influences the connection between exchange rates and macroeconomic variables, this paper firstly investigates how CBI revolutions are relevant to structural changes in monetary responses to inflationary pressure. In addition, by introducing the structural changes of monetary policy regime into explanation and prediction of exchange rate movements, some prominent features are found in the USD/GBP exchange rate. This paper indicates that the BoE made significant changes in monetary policy stance following CBI revolutions. Over the whole sample period, October 1986- September 2008, exchange rate disconnect puzzle still dominates. However, sub-period analysis after inflation targeting adoption implies that Taylor rule model with the U.K. forecasted variables offers a better exchange rate predictability than the random walk model. As CBI revolutions provide rational explanations about the changes of monetary behaviours, our results support that CBI influences the exchange rate connection with fundamentals through shifts of monetary policy