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Monetary Policy Transmission through the Exchange Rate Factor Structure
(with Alexandre Pecora,  Fabricius Somogyi, and Colin Ward)

First version: September 2024
This version:  November  2024


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Abstract:

We show that US monetary policy is transmitted internationally through the
factor structure of exchange rates. Following an unexpected easing,
investment funds sell safe and buy risky currencies.
Global US banks, similarly, tilt their distribution of foreign loan origination
toward currencies of greater systematic currency risk.
The effects of monetary policy on currency flows and loans persist for
several months and feed into the leverage and real investment decisions of firms
and, in particular, those that operate using a high-risk currency.
We argue that currencies' factor exposures are a lens through which
we can understand the international transmission of US monetary policy.



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