Revisiting the exchange rate dynamics at the US zero lower bound

Revisiting the exchange rate dynamics at the US zero lower bound

This study revisits the dynamics of dollar/euro exchange rate in response to the US monetary policy shock at the zero lower bound (ZLB) including the COVID-19 pandemic. The key findings are as follows. First, the exchange rate behavior indicates Dornbusch (1976)’s overshooting hypothesis at the states classified as beginning and ending of the ZLB. Second, the revived ZLB induced by the COVID-19 pandemic has a larger impact on the exchange rate than that induced by the global financial crisis. Third, the responses of the exchange rates demonstrate the uncovered interest rate parity and the overshooting.