Research

This paper argues that the post-GFC shift in monetary policy towards financial stability provides a single, unified explanation for the simultaneous resolution of the Fama, Backus-Smith, and Meese-Rogoff puzzles. I document these contemporaneous structural breaks and introduce a new stylized fact: an “Asymmetric R-squared” in the Fama regression. Using a two-country New Keynesian model estimated via Simulated Method of Moment, I show the policy shift replicates these empirical patterns by fundamentally altering the covariance between interest rate differentials and the underlying financial shocks that drive exchange rates. This policy-driven change in the sign and magnitude of the covariance quantitatively explains all the three foundational puzzles and the Asymmetric R-squared in the Fama regression. The findings highlight the critical importance of accounting for evolving policy reaction functions when interpreting international macroeconomic regularities. 

This project empirically examines how monetary policy generates asymmetric exchange rate responses via the financial risk-taking channel. Using state-dependent local projection methods and Oaxaca-Blinder decomposition, I find that the exchange rate's response to shocks differs significantly across policy environments. Specifically, expansionary monetary policy stances accelerate the adjustment of excess returns and amplify exchange rate movements, consistent with heightened financial risk-taking. This motivates a theoretical extension to endogenize intermediary risk appetite.