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The high-frequency response of exchange rates to monetary policy actions and statements

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  • Rosa, Carlo

Abstract

This paper investigates the impact of US monetary policy on the level and volatility of exchange rates using an event study with intraday data for five currencies (the US dollar exchange rate versus the euro, the Canadian dollar, the British pound, the Swiss franc, and the Japanese yen). I construct two indicators of news about monetary policy stemming separately from policy decisions and from balance of risk statements. Estimation results show that both policy decisions and communication have economically large and highly significant effects on the exchange rates, with the surprise component of statements accounting for most of the explainable variation in exchange rate returns in response to monetary policy. This paper also shows that exchange rates tend to absorb FOMC monetary surprises within 30-40Â min from the announcement release.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 2 (February)
Pages: 478-489

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:2:p:478-489

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: C14 E52 E58 F31 High-frequency exchange rates US Federal Reserve Central bank communication Monetary policy shocks News shocks;

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References

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  1. Michel Beine & Oscar Bernal Diaz & Jean-Yves Gnabo & Christelle Lecourt, 2007. "Intervention Policy of the BoJ: a Unified Approach," Working Papers CEB 07-013.RS, ULB -- Universite Libre de Bruxelles.
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  14. Rasmus Fatum & Barry Scholnick, . "Monetary Policy News and Exchange Rate Responses: Do Only Surprises Matter?," EPRU Working Paper Series 05-14, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Nov 2005.
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Citations

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Cited by:
  1. Selva Demiralp & Hakan Kara & Pýnar Özlü, 2011. "Monetary policy communication under inflation targeting: Do words speak louder than actions?," Koç University-TUSIAD Economic Research Forum Working Papers 1128, Koc University-TUSIAD Economic Research Forum.
  2. Matthias Bauer & Martin Zenker, 2012. "Minor Nuisance Around Foreign Exchange Markets - Lessons from the Stability and Growth Pact Debate," Global Financial Markets Working Paper Series 2012-32, Friedrich-Schiller-University Jena.
  3. Carlo Rosa, 2013. "The high-frequency response of energy prices to monetary policy: understanding the empirical evidence," Staff Reports 598, Federal Reserve Bank of New York.
  4. Vithessonthi, Chaiporn, 2014. "Monetary policy and the first- and second-moment exchange rate change during the global financial crisis: Evidence from Thailand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 170-194.
  5. Balázs Égert & Evžen Kočenda, 2012. "The impact of macro news and central bank communication on emerging European forex markets," EconomiX Working Papers 2012-20, University of Paris West - Nanterre la Défense, EconomiX.
  6. Demiralp, Selva & Kara, Hakan & Özlü, Pınar, 2012. "Monetary policy communication in Turkey," European Journal of Political Economy, Elsevier, vol. 28(4), pages 540-556.
  7. Rosa, Carlo, 2013. "Market efficiency broadcasted live: ECB code words and euro exchange rates," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 167-178.
  8. Carlo Rosa, 2012. "How "unconventional" are large-scale asset purchases? The impact of monetary policy on asset prices," Staff Reports 560, Federal Reserve Bank of New York.
  9. Yutaka Kurihara, 2012. "Exchange rate determination and structural changes in response to monetary policies," Studies in Economics and Finance, Emerald Group Publishing, vol. 29(3), pages 187-196, August.
  10. Evans, Kevin P., 2011. "Intraday jumps and US macroeconomic news announcements," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2511-2527, October.

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