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Policy Words and Policy Deeds: The ECB and the Euro

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Author Info
Pierre L. Siklos () (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.)
Martin T. Bohl () (WestfŠlische Wilhelms-University MŸnster, Germany)

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Abstract

This paper examines the role of the ECB communication activities on daily Eurodollar exchange rate and interest rates. We estimate the relationship between monetary policy and the exchange rate using a technique that explicitly recognizes the joint determination of both the levels and volatilities of these variables. We also consider more traditional estimation strategies as a test of the robustness of our main results. We introduce a new indicator of ECB communications policies that focuses on what the ECB says about the future economic outlook for the euro area along five different economic dimensions. The impact of ECB communications policies is more apparent in the time series framework than in the heteroskedasticity estimator approach. Time series estimates reveal that interest rate changes generally have a much larger impact on exchange rate movements, and their volatility, than do ECB verbal pronouncements. Previous studies that conclude that news effects are significant at the daily frequency may have reached such a conclusion because the measurement of news was too highly aggregated. The endogeneity of the exchange rate-interest rate relationship is more apparent when the proxy for monetary policy is the euro area-US differential than when any other proxy for monetary policy is employed.

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Paper provided by Rimini Centre for Economic Analysis in its series Working Paper Series with number 35-07.

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Date of creation: Jul 2007
Date of revision: Jul 2007
Handle: RePEc:rim:rimwps:35-07

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Related research
Keywords: Central bank communication; Eurodollar exchange rate;

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Find related papers by JEL classification:
F3 - International Economics - - International Finance
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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  33. Laakkonen , Helinä, 2004. "The impact of macroeconomic news on exchange rate volatility," Research Discussion Papers 24/2004, Bank of Finland. [Downloadable!]
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Full 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.)

  1. Jokipii, Terhi, 2006. "Forecasting market crashes: further international evidence," Research Discussion Papers 22/2006, Bank of Finland. [Downloadable!]
  2. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob de Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," DNB Working Papers 170, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  3. Anandarajan , Asokan & Hasan , Iftekhar & McCarthy , Cornelia, 2006. "The use of loan loss provisions for capital management, earnings management and signalling by Australian banks," Research Discussion Papers 23/2006, Bank of Finland. [Downloadable!]
  4. Marsh , Ian W, 2006. "The effect of lenders’ credit risk transfer activities on borrowing firms’ equity returns," Research Discussion Papers 31/2006, Bank of Finland. [Downloadable!]
  5. Jokivuolle , Esa & Peura , Samu, 2006. "Rating targeting and the confidence levels implicit in bank capital," Research Discussion Papers 27/2006, Bank of Finland. [Downloadable!]
  6. Özer Karagedikli & Pierre L. Siklos, 2008. "Explaining Movements in the NZ Dollar - Central Bank Communication and the Surprise Element in Monetary Policy?," Reserve Bank of New Zealand Discussion Paper Series DP2008/02, Reserve Bank of New Zealand. [Downloadable!]
  7. Välimäki , Tuomas, 2006. "Why the marginal MRO rate exceeds the ECB policy rate?," Research Discussion Papers 20/2006, Bank of Finland. [Downloadable!]
  8. Don Bredin & Stuart Hyde & Dirk Nitzsche & Gerard O'Reilly, 2009. "European monetary policy surprises: the aggregate and sectoral stock market response," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(2), pages 156-171. [Downloadable!]
    Other versions:
  9. Kilponen , Juha & Kinnunen , Helvi & Ripatti , Antti, 2006. "Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model," Research Discussion Papers 28/2006, Bank of Finland. [Downloadable!]
  10. Péter Gábriel & Klára Pintér, 2006. "The effect of the MNB’s communication on financial markets," MNB Working Papers 2006/9, Magyar Nemzeti Bank (The Central Bank of Hungary). [Downloadable!]
  11. Marcel Fratzscher & Arnaud Mehl, 2008. "Do China and oil exporters influence major currency configurations?," Working Paper Series 973, European Central Bank. [Downloadable!]
    Other versions:
  12. Aalto-Setälä , Ville & Schindler, Robert, 2006. "The importance of attractive prices in pricing dynamics," Research Discussion Papers 30/2006, Bank of Finland. [Downloadable!]
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