Monetary policy, financial uncertainty, and exchange rates dynamics

The main goal of this thesis is to explore the distinct impacts of monetary policy shocks and information shocks on the exchange rate USD/EUR. This research includes a comprehensive analysis of the effects of these shocks on several macroeconomic variables. To achieve this, I will use the Vector Autoregressive models toolkit, employing an “internal instrument” VAR framework leading to the very same results as a pure structural VAR model. The analysis of results and the exploration of the key research question are conducted through the analysis of impulse response functions and forecast error variance decompositions. Some robustness checks are carried out to assess the strength of the results. The dataset covers the period from 1999 to 2018, containing monthly data, and includes a range of key macroeconomic variables, such as exchange rates, long-term interest rates, inflation levels, as well as variables used as a proxy for the economic output and the stock market, like industrial production, unemployment rate and S&P500 index levels. The baseline VAR model includes eight variables and incorporates one lag, minimizing the BIC criterion, to better understand the different impacts of monetary and information shocks and their implications for crucial macroeconomic variables.