The Impact of the U.S. Monetary Policy Shock on the KRW Exchange Rate - Event Study Approach -

This study quantifies the impact of US monetary policy on the Korean currency rate. Taking an event study approach for the sample period 2000-2019, the Korean won exchange rate responses around the Federal Open Market Committee meetings to the traditional interest rate policy, quantitative easing, and forward guidance, are quantified. On the conventional interest rate policy, a strong exchange rate response to Federal Funds rates is observed. In particular, a 100 basis point contractionary surprise in the Federal Funds rate leads in approximately 5 to 6 percent depreciation of the Korean won. Furthermore, it takes several days for market participants to fully incorporate information from the FOMC meeting, indicating that there is some friction in the foreign exchange market. In terms of unconventional monetary policy, (expansionary) quantitative easing and forward guidance result in a 1.5 percent appreciation of the Korean won. In addition, evidence of heterogenous effect of the unconventional policy is documented. It turns out that only the first round of quantitative easing and expansionary forward guidance are effective.