Reuven Glick and Sylvain Leduc examine the effectiveness of monetary policy when the policy rate is at the zero bound (i.e. they look at the ability of unconventional policy to change the exchange rate -- this is a highly condensed version of their argument):
Unconventional Monetary Policy and the Dollar, by Reuven Glick and Sylvain Leduc, Economic Letter, FRBSF: After the financial crisis began in 2007, the Federal Reserve reduced the federal funds rate, its main policy tool, close to zero, its lowest possible level. It has remained there since. Because the federal funds rate cannot be reduced further, the Fed has introduced unconventional policy measures to stimulate the economy. One of these unconventional measures is large-scale asset purchases, which are intended to lower long-term interest rates. Another measure is known as forward guidance, communication about the Fed’s expectations for future policy that is intended to guide market expectations and reduce policy uncertainty.
The effectiveness of these new policy tools is an open question. In particular, we don’t know whether the standard channel for transmitting monetary policy through financial markets works as well now as it did in the past. One way to measure the effectiveness of unconventional monetary policy tools is through the U.S. dollar exchange rate. Although the Fed does not target the exchange rate specifically, monetary policy decisions ultimately affect the dollar’s value, which can have important effects on the economy. For example, before the crisis, the dollar typically depreciated following declines in the target for the federal funds rate. The lower value of the dollar in turn helped raise U.S. net exports, boosting output and employment in the United States.
This Economic Letter examines how unconventional policy decisions have affected the value of the. dollar since the Fed lowered the federal funds rate close to zero in December 2008. We look at how the dollar’s value changed during the minutes immediately after Fed policy announcements. This helps isolate the response of the dollar to monetary announcements from other possible factors. In addition, because financial and currency markets may anticipate policy changes and build those expectations into prices, we account for those expectations and focus on the effects of surprise policy announcements.
Our analysis shows that unconventional monetary policy has affected the dollar exchange rate. In particular, surprise unconventional policy easing has pushed down the value of the dollar roughly as much as similar surprise downward moves in the federal funds rate did before the crisis. ...
It is more difficult to assess whether these changes in the dollar’s value stemming from unconventional monetary policy have similar effects on U.S. net exports as those stemming from conventional policy. The recent boost to net exports from a weaker dollar may have been obscured by other factors, such as reductions in foreign demand stemming from uncertainty about Europe’s economic recovery.