THREE ESSAYS ON EXCHANGE RATE AND MONETARY POLICY

There are four chapters in my dissertation. Chapter one gives a brief introduction of the three essays. Chapter two empirically analyzes the interaction among conventional monetary policy, foreign exchange intervention and the exchange rate in a unifying model for Japan. I have several findings. First, the results lend support to the leaning-against-the-wind hypothesis. Second, conventional monetary policy has as great influence on the exchange rate as foreign exchange intervention in Japan. Third, intervention in Japan is ineffective or may be counter-effective, so escaping liquidity trap by intervention alone may not be a feasible way. Chapter three empirically identifies the sources of exchange rate movements of Japan vis--vis the US, and investigates the role of the exchange rate in the macro economy adjustment. It finds that real shocks dominate nominal shocks in explaining the exchange rate movements, with relative real demand shocks as the major contributor. And the exchange rate market does not create many shocks. The overall result supports that the bilateral exchange rate in Japan is a shock-absorber rather than a source of shock. Chapter four provides cross-country and time-series evidence on the extent of exchange rate pass-through at different stages of distribution - import prices, producer prices and consumer prices - for eight major industrial countries: United States, Japan, Canada, Italy, UK, Finland, Sweden and Spain. I find exchange rate pass-through incomplete in many horizons, though complete pass-through is observed occasionally. The degree of pass-through declines and time needed for complete pass-through lengthens along the distribution chain. Furthermore, I find that a greater pass-through coefficient is associated with an economy that is smaller in size with higher import shares, more persistent and less volatile exchange rate shocks, more volatile monetary shocks, higher inflation rate, and less volatile GDP