This paper investigates whether the fall in the euro-dollar exchange rate in the course of 2000 can be partly attributed to asymmetric reactions by investors to economic and political news. We have studied the daily euro-dollar exchange rate changes recorded from 1 April 2000 to the first co-ordinated exchange rate intervention on 22 September 2000, regressing these changes on economic and political news items about the US and the euro area. The paper suggests that investors' response to news about the US differs from that to news about the euro area. Specifically, the exchange rate did not respond to economic news about the euro area, whereas it did to US economic news. There are indications that the opposite holds true in respect of political news. Moreover, the paper shows a difference in the magnitude in the reaction to `good' and `bad' news items, which may suggest some additional news filtering by investors (cognitive dissonance). These asymmetric reaction pattern may explain at least partly why, contrary to what exchange rate theory would predict, the recovery of the economy in the euro area in the course of 2000 was not followed by an appreciation of the euro vis-à-vis the dollar. Importantly, given the relevance of political euro area news to investors, politicians and central bankers face the challenge to convince market participants of the viability of EMU.
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Paper provided by Netherlands Central Bank, Monetary and Economic Policy Department in its series MEB Series (discontinued) with number
2001-6.
Find related papers by JEL classification: D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information F31 - International Economics - - International Finance - - - Foreign Exchange G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Nicholas Barberis & Andrei Shleifer & Robert W. Vishny, 1997.
"A Model of Investor Sentiment,"
NBER Working Papers
5926, National Bureau of Economic Research, Inc.
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