Exchange Rate Volatility and U. S. Monetary Policy: An ARCH Application

This paper examines the effect of shifts in U.S. monetary policy regimes on the stochastic process that generates foreign exchange rates. To account for the observed behavior of the data record, the author models nominal, dollar exchange rates as univariate autoregressive conditional heteroskedastic processes. He then tests the stability of this process across U.S. monetary policy regimes. For four of the currencies in the sample, accounting for regime shifts improves the fit of the model. Regime shifts also appear to diminish the degree of persistence of variance, making it less likely that exchange rates are integrated-in-variance.