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The Impact of Monetary Policy on the Exchange Rate: A Study Using Intraday Data Author info | Abstract | Publisher info | Download info | Related research | Statistics Jonathan Kearns (Reserve Bank of Australia)
Phil Manners (Reserve Bank of Australia)
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This paper uses intraday data to estimate the effect of changes in monetary policy on the exchange rate. We use an event study with carefully selected sample periods for four countries (Australia, Canada, New Zealand and the United Kingdom) to ensure that the change in monetary policy is exogenous to the exchange rate. Intraday data allow us to use a short event window, which improves the accuracy of estimates, and demonstrates that the change in policy is rapidly incorporated into the exchange rate. On average, an unanticipated tightening of 25 basis points is found to appreciate the exchange rate by around 0.35 per cent, with estimates for the individual countries ranging from ¼–½ of a per cent. The estimation indicates that monetary policy changes account for only a small part of the observed variability of exchange rates in these countries. We also find that changes in monetary policy have substantially different effects on the exchange rate depending on how they alter expectations regarding future policy. Surprises that cause expectations of future policy to be revised by the full amount of the surprise are found to have a larger impact on the exchange rate (around 0.4 per cent) than surprises that only bring forward an anticipated change in policy and do not change expectations of future policy (around 0.2 per cent).
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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number
rdp2005-02.
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Date of creation: Apr 2005Date of revision:
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Keywords: exchange rates monetary policy intraday data Other versions of this item:
Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports :
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references Cited by : (explanations , 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.)
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