Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary Policy News and Exchange Rate Responses: Do Only Surprises Matter?

Contents:

Author Info

  • Rasmus Fatum

    (School of Business, University of Alberta)

  • Barry Scholnick

    (School of Business, University of Alberta)

Abstract

This paper shows that exchange rates respond to only the surprise component of an actual US monetary policy change and that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false acceptance of the hypothesis that monetary policy has no impact on exchange rates. This finding implies that there is a need for reexamining the empirical analyses of asset price responses to macro news that do not isolate the unexpected component of news from the expected element. In addition, we add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.econ.ku.dk/epru/files/wp/wp-05-14.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 05-14.

as in new window
Length: 19 pages
Date of creation:
Date of revision: Nov 2005
Handle: RePEc:kud:epruwp:05-14

Contact details of provider:
Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark
Phone: (+45) 3532 4411
Fax: +45 35 32 30 00
Email:
Web page: http://www.econ.ku.dk/epru/
More information through EDIRC

Related research

Keywords: expectations; monetary policy; federal funds futures; exchange rates;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. John B. Carlson & Jean M. McIntire & James B. Thomson, 1995. "Federal funds futures as an indicator of future monetary policy: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 20-30.
  2. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 201-212, April.
  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.).
  4. Yin-Wong Cheung & Menzie D. Chinn, 2000. "Currency Traders and Exchange Rate Dynamics: A Survey of the U.S. Market," CESifo Working Paper Series 251, CESifo Group Munich.
  5. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-15, March.
  6. Fatum, Rasmus & Scholnick, Barry, 2006. "Do Exchange Rates Respond to Day-to-Day Changes in Monetary Policy Expectations When No Monetary Policy Changes Occur?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1641-1657, September.
  7. Engel, Charles & West, Kenneth D., 2003. "Exchange rates and fundamentals," Working Paper Series 0248, European Central Bank.
  8. Mishkin, Frederic S, 1982. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 22-51, February.
  9. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," NBER Working Papers 8959, National Bureau of Economic Research, Inc.
  10. Bonser-Neal, Catherine & Tanner, Glenn, 1996. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 853-878, December.
  11. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  12. Bonser-Neal, Catherine & Roley, V Vance & Sellon, Gordon H, Jr, 1998. "Monetary Policy Actions, Intervention, and Exchange Rates: A Reexamination of the Empirical Relationships Using Federal Funds Rate Target Data," The Journal of Business, University of Chicago Press, vol. 71(2), pages 147-77, April.
  13. Monika Piazzesi & Eric Swanson, 2004. "Future prices as risk-adjusted forecasts of monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  14. Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
  15. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
  16. Barro, Robert J. & Hercowitz, Zvi, 1980. "Money stock revisions and unanticipated money growth," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 257-267, April.
  17. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
  18. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. 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.
  20. Simpson, Marc W. & Ramchander, Sanjay & Chaudhry, Mukesh, 2005. "The impact of macroeconomic surprises on spot and forward foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 24(5), pages 693-718, September.
  21. Brian Sack, 2002. "Extracting the expected path of monetary policy from futures rates," Finance and Economics Discussion Series 2002-56, Board of Governors of the Federal Reserve System (U.S.).
  22. Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448 Elsevier.
  23. Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
  24. Sergey V. Chernenko, 2004. "The information content of forward and futures prices: market expectations and the price of risk," International Finance Discussion Papers 808, Board of Governors of the Federal Reserve System (U.S.).
  25. Alain P. Chaboud & Sergey Chernenko & Edward Howorka & Raj S. Krishnasami Iyer & David Liu & Jonathan H. Wright, 2004. "The high-frequency effects of U.S. macroeconomic data releases on prices and trading activity in the global interdealer foreign exchange market," International Finance Discussion Papers 823, Board of Governors of the Federal Reserve System (U.S.).
  26. 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.
  27. Martin D.D. Evans & Richard K. Lyons, 2005. "Do Currency Markets Absorb News Quickly?," NBER Working Papers 11041, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Fischer, Andreas M & Ranaldo, Angelo, 2008. "Does FOMC News Increase Global FX Trading?," CEPR Discussion Papers 6753, C.E.P.R. Discussion Papers.
  2. 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.
  3. 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.
  4. Moura, Marcelo L. & Gaião, Rafael L., 2014. "Impact of macroeconomic surprises on the Brazilian yield curve and expected inflation," The North American Journal of Economics and Finance, Elsevier, vol. 27(C), pages 114-144.
  5. Rosa, Carlo, 2011. "The high-frequency response of exchange rates to monetary policy actions and statements," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 478-489, February.
  6. Rasmus Fatum & Michael Hutchison & Thomas Wu, 2010. "Asymmetries and state dependence: the impact of macro surprises on intraday exchange rates," Globalization and Monetary Policy Institute Working Paper 49, Federal Reserve Bank of Dallas.
  7. Hussain, Syed Mujahid, 2011. "Simultaneous monetary policy announcements and international stock markets response: An intraday analysis," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 752-764, March.
  8. Gospodinov, Nikolay & Jamali, Ibrahim, 2013. "Monetary policy surprises, positions of traders, and changes in commodity futures prices," Working Paper 2013-12, Federal Reserve Bank of Atlanta.
  9. 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.
  10. Moura, Marcelo L. & Gaião, Rafael Ladeira, 2012. "Impact of macroeconomic surprises on the brazilian yield curve and expected inflation," Insper Working Papers wpe_288, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  11. Rosa, Carlo, 2013. "Market efficiency broadcasted live: ECB code words and euro exchange rates," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 167-178.
  12. 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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:kud:epruwp:05-14. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Hoffmann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.