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Policy Words and Policy Deeds: The ECB and the Euro

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  • 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)

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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Bibliographic Info

Paper provided by The 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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Keywords: Central bank communication; Eurodollar exchange rate;

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References

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Citations

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Cited by:
  1. 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," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-45, December.
  2. Fratzscher, Marcel & Mehl, Arnaud, 2008. "Do China and oil exporters influence major currency configurations?," Working Paper Series 0973, European Central Bank.
  3. 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).
  4. Balazs Egert, 2009. "The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa," William Davidson Institute Working Papers Series wp955, William Davidson Institute at the University of Michigan.
  5. Balazs Egert & Evžen Kocenda, 2013. "The Impact of Macro News and Central Bank Communication on Emerging European Forex Markets," CESifo Working Paper Series 4288, CESifo Group Munich.
  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.
  7. Bohl , Martin T & Mayes , David G & Siklos, Pierre L, 2009. "The quality of monetary policy and inflation performance: globalization and its aftermath," Research Discussion Papers 31/2009, Bank of Finland.
  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.
  9. Jakob Haan, 2008. "The effect of ECB communication on interest rates: An assessment," The Review of International Organizations, Springer, vol. 3(4), pages 375-398, December.
  10. Moessner, Richhild & Allen, William A., 2013. "Central bank swap line effectiveness during the euro area sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 167-178.

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