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Identifying the effects of monetary policy shocks on exchange rates using high frequency data

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  • Faust, Jon
  • Rogers, John H.
  • Swanson, Eric
  • Wright, Jonathan H.

Abstract

This paper proposes a new approach to identifying the effects of monetary policy shocks in an international vector autoregression. Using high-frequency data on the prices of eurodollar contracts, we measure the impact of the surprise component of the FOMC-day Federal Reserve policy decision on financial variables, such as the exchange rate and the foreign interest rate. We show how this information can be used to achieve identification without having to make the usual strong assumption of a recursive ordering. JEL Classification: C32, E52, F30

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0167.

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Date of creation: Aug 2002
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Handle: RePEc:ecb:ecbwps:20020167

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Keywords: Exchange Rates; High Frequency Data; Identification; monetary policy; Vector autoregression;

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  1. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 31-50.
  2. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
  3. Jon Faust & John H. Rogers, 1999. "Monetary policy's role in exchange rate behavior," International Finance Discussion Papers 652, Board of Governors of the Federal Reserve System (U.S.).
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  8. Runkle, David E, 1987. "Vector Autoregressions and Reality: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 454, October.
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  13. James H. Stock & Jonathan Wright, 2000. "GMM with Weak Identification," Econometrica, Econometric Society, vol. 68(5), pages 1055-1096, September.
  14. Jon Faust & Eric Swanson & and Jonathan H. Wright, 2002. "Identifying vars based on high frequency futures data," International Finance Discussion Papers 720, Board of Governors of the Federal Reserve System (U.S.).
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  16. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
  17. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
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  19. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper 95-7, Federal Reserve Bank of Atlanta.
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  21. Jean-Marie Dufour, 1997. "Some Impossibility Theorems in Econometrics with Applications to Structural and Dynamic Models," Econometrica, Econometric Society, vol. 65(6), pages 1365-1388, November.
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  25. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
  26. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 207-244, December.
  27. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
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