The Relative Size of New Zealand Exchange Rate and Interest Rate Responses to News
AbstractThis paper examines the relative size of the effects of New Zealand monetary policy and macroeconomic data surprises on the spot exchange rate, 2 and 5 year swap rate differentials, and the synthetic forward exchange rate schedule. We find that the spot exchange rate and 5 year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5 year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered.
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Bibliographic InfoPaper provided by Motu Economic and Public Policy Research in its series Working Papers with number 08_08.
Length: 26 pages
Date of creation: Jun 2008
Date of revision:
New Zealand; interest rates; exchange rates; news;
Other versions of this item:
- Andrew Coleman & Özer Karagedikli, 2008. "The relative size of New Zealand exchange rate and interest rate responses to news," Reserve Bank of New Zealand Discussion Paper Series DP2008/12, Reserve Bank of New Zealand.
- NEP-ALL-2008-07-20 (All new papers)
- NEP-CBA-2008-07-20 (Central Banking)
- NEP-IFN-2008-07-20 (International Finance)
- NEP-MAC-2008-07-20 (Macroeconomics)
- NEP-MON-2008-07-20 (Monetary Economics)
- NEP-OPM-2008-07-20 (Open Economy Macroeconomic)
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