Unconventional Policies and Exchange Rate Dynamics

We study exchange rate dynamics under cooperative and self-oriented policies in a two-country DSGE modelwith unconventional monetary and exchange rate policies. The cooperative solution features a large exchangerate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policyinstruments. Self-oriented policies (Nash equilibrium), however, entail limited exchange rate movements and anaggressive use of unconventional policies in both countries. Our results highlight the role of international policycooperation in allowing the exchange rate to play the traditional role of shock absorber