Colloquium - Ingmar Rövekamp "US Monetary Policy and the Stability of Currency Pegs"

Abstract:
I study the pricing of American Depositary Receipts around FOMC meetings to identify the impact of US monetary policy on managed exchange rates. ADR investors anticipate that the domestic central bank will be reluctant to mimic US policy rate increases if the costs of maintaining the peg regime are high, i.e., the current state of the domestic economy is poor. In line with currency crises models of interest rate defence, I find that positive US monetary surprises increase the breakdown probability of pegs with low real GDP growth, high fiscal deficits, high sovereign risk and a weak domestic banking sector.