The Impact of US Monetary Policy on Managed Exchange Rates

Abstract

I study the impact of US monetary policy on managed exchange rates by analyzing the pricing of American Depositary Receipts (ADRs) around FOMC meetings. The significant negative impact of US monetary surprises on abnormal ADR returns for currencies that are managed reflects changes in these currencies’ fundamental values due to US monetary policy shocks. In line with currency crises models of interest rate defence like Lahiri & Vegh (2007), I find that positive US monetary surprises increase the breakdown probability of currency pegs of countries characterized by low real GDP growth, high fiscal deficits and a weak domestic banking sector.