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Policy Words and Policy Deeds: The ECB and the Euro

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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. 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. Finally, interest rate changes generally have a much larger impact on exchange rate movements, and their volatility, than do ECB verbal pronouncements.

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File URL: http://www.wlu.ca/documents/22947/PWPD_July2006.pdf
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Bibliographic Info

Paper provided by Wilfrid Laurier University, Department of Economics in its series Working Papers with number eg0050.

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Length: 46
Date of creation: 2006
Date of revision: 2006
Handle: RePEc:wlu:wpaper:eg0050

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Keywords: Central bank communication; Eurodollar exchange rate;

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Cited by:
  1. Balázs Égert & Evžen Kočenda, 2012. "The impact of macro news and central bank communication on emerging European forex markets," EconomiX Working Papers 2012-20, University of Paris West - Nanterre la Défense, EconomiX.
  2. 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).
  3. Balázs Égert, 2010. "The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa," Open Economies Review, Springer, vol. 21(5), pages 655-677, November.
  4. 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.
  5. 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.
  6. 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.
  7. Marcel Fratzscher & Arnaud Mehl, 2009. "Do China and oil exporters influence major currency configurations?," Globalization and Monetary Policy Institute Working Paper 25, Federal Reserve Bank of Dallas.
  8. Bredin, Don & Hyde, Stuart & O'Reilly, Gerard, 2005. "European Monetary Policy Surprises: The Aggregate and Sectoral Stock Market Response," Research Technical Papers 10/RT/05, Central Bank of Ireland.
  9. 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.
  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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