Abstract:

After the 2008-2009 financial crisis, national and international spillover effects of the Fed’s monetary policies have become the subject of many scientific studies. In this study, the relationship between US overnight Interbank rates, 10-year US and UK bond rates and the US real exchange rate was examined using the Blanchard-Quah type structured VAR (SVAR) model. The finding that the contractionary monetary policy in the US will lead to appreciation of the real exchange rate has also been supported by the variance decomposition analysis which is in line with the Mundell-Fleming model. Another result of the study is that the contractionary monetary policy in the U.S. will increase confidence in the U.S. economy and lead to significant capital inflows. The study also indicated that changes in the U.S. monetary policy would have an impact on the central bank and money market in the UK. Our SVAR model highlights the role of short-term interest rates of the US to mitigate fluctuations in money, good and foreign exchange markets.

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