“The paper analysed the effects of expansionary monetary policy on the real and nominal exchange rate. The results show that excess domestic credit or excess money supply feed into the cyclical movements of the real exchange rate. In addition, the cyclical movements of the real exchange rate drive each other with excess money supply growth. These results tend to confirm the hypothesis in this paper that monetary shocks affect the real exchange rate. The results further show that there are feedback effects between monetary shocks and the cyclical movements of the real exchange rate and that this cyclical component appreciates the nominal exchange rate. In addition, money supply growth depreciates the nominal exchange rate, exchange rate interventions have been important in explaining nominal exchange rate movements, and real income and inflation are negatively associated with the nominal exchange rate movements.”
