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Do China and oil exporters influence major currency configurations?

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  • Fratzscher, Marcel
  • Mehl, Arnaud

Abstract

This paper analyses the impact of the shift away from a US dollar focus of systemically important emerging market economies (EMEs) on configurations between the US dollar, the euro and the yen. Given the difficulty that fixed or managed US dollar exchange rate regimes remain pervasive and reserve compositions mostly kept secret, the identification strategy of the paper is to analyse the market impact on major currency pairs of official statements made by EME policy-makers about their exchange rate regime and reserve composition. Developing a novel database for 18 EMEs, we find that such statements not only have a statistically but also an economically significant impact on the euro, and to a lesser extent the yen against the US dollar. The findings suggest that communication hinting at a weakening of EMEs’ US dollar focus contributed substantially to the appreciation of the euro against the US dollar in recent years. Interestingly, EME policy-makers appear to have become more cautious in their communication more recently. Overall, the results underscore the growing systemic importance of EMEs for global exchange rate configurations. JEL Classification: E58, F30, F31, F36, G15

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0973.

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Date of creation: Dec 2008
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Handle: RePEc:ecb:ecbwps:20080973

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Keywords: communication; dollar; emerging economies; euro; exchange rate regime; reserves;

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References

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  1. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
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  3. Balazs Egert, 2006. "Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies," CESifo Working Paper Series 1869, CESifo Group Munich.
  4. Blinder, Alan S. & Ehrmann, Michael & de Haan, Jakob & Fratzscher, Marcel & Jansen, David-Jan, 2008. "Central Bank communication and monetary policy: a survey of theory and evidence," Working Paper Series, European Central Bank 0898, European Central Bank.
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  6. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
  7. Fratzscher, Marcel, 2004. "Communication and exchange rate policy," Working Paper Series, European Central Bank 0363, European Central Bank.
  8. Kathryn M.E. Dominguez & Freyan Panthaki, 2007. "The Influence of Actual and Unrequited Interventions," NBER Working Papers 12953, National Bureau of Economic Research, Inc.
  9. David-Jan Jansen & Jakob de Haan, 2005. "Were Verbal Efforts to Support the Euro Effective? A High-Frequency Analysis of ECB Statements," DNB Working Papers, Netherlands Central Bank, Research Department 033, Netherlands Central Bank, Research Department.
  10. P. Siklos, M. Bohl, 2006. "Policy Words and Policy Deeds: The ECB and the Euro," Working Papers, Wilfrid Laurier University, Department of Economics eg0050, Wilfrid Laurier University, Department of Economics, revised 2006.
  11. Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(2), pages 343-361, March.
  12. Fratzscher, Marcel, 2009. "How successful is the G7 in managing exchange rates?," Journal of International Economics, Elsevier, vol. 79(1), pages 78-88, September.
  13. Marcel Fratzscher, 2008. "Oral Interventions Versus Actual Interventions in Fx Markets - An Event-Study Approach," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 118(530), pages 1079-1106, 07.
  14. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 71, pages 1-11, 02.
  15. Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
  16. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
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Cited by:
  1. Fratzscher, Marcel, 2009. "How successful is the G7 in managing exchange rates?," Journal of International Economics, Elsevier, vol. 79(1), pages 78-88, September.
  2. Fratzscher, Marcel & Mehl, Arnaud, 2011. "China's dominance hypothesis and the emergence of a tri-polar global currency system," Working Paper Series, European Central Bank 1392, European Central Bank.

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