It is worth noting that the Taylor rule reacts only to the four-quarter change in core consumer price inflation and the output gap (actual minus potential gross domestic product); monetary policy does not respond directly to the exchange rate. As illustrated by Figure 1, the risk premium shock has broadly similar effects on the United States under either specification of pass-through.
In particular, the shock raises real net exports, because the induced depreciation of the dollar raises the relative price of imported goods and reduces the price of U.S. exports in foreign markets. This strengthening of real net exports, in turn, boosts U.S. output.