The Dollar during the Great Recession: The Information Channel of U.S. Monetary Policy and the “Flight to Safety”
Abstract
ABSTRACT Conventional wisdom holds that lowering a home country's interest rate relative to another's will depreciate the domestic currency. We document that, at business‐cycle frequencies, U.S. forward guidance monetary policy easings had the opposite effect during the Great Recession. We attribute this effect to calendar‐based forward guidance that signaled economic weakness, resulting in a “flight‐to‐safety” effect and lower expected U.S. inflation. We also document cross‐currency heterogeneity: a surprise U.S. rate cut induced a larger appreciation of the dollar against currencies that typically depreciate more when the world economy is contracting. We build a model that can reconcile these findings.
Fields of Study & Subjects
Global Financial Crisis and Policies
Monetary Policy and Economic Impact
Economic Theory and Policy
Publication details
- Journal / source
- The Journal of Finance
- Publisher
- Wiley
- Volume
- 81
- Issue
- 2
- Pages
- 971–1010
- Publication date
- 27 January 2026
- Language
- EN