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Do Exchange Rates Respond to Day-to-Day Changes in Monetary Policy Expectations? Evidence from the Federal Funds Futures Market

Author

Listed:
  • Rasmus Fatum

    (University of Alberta)

  • Barry Scholnick

    (University of Alberta)

Abstract

This paper is the first to utilize the informational content embodied in Federal funds futures contracts for extracting day-to-day changes in expectations of future US monetary policy, in the context of a study of day-to-day exchange rate changes. We analyze more than 12 years of daily exchange rate data and show that continuous day-to-day changes in expectations of future US monetary policy has a significant and systematic impact on day-to-day changes in exchange rates. Our results imply that monetary policy matters for daily exchange rate determination in more ways than merely through infrequent, actual policy changes. Furthermore, when focusing on the actual monetary policy changes, the paper confirms that only the unexpected element of a policy change impacts exchange rates. The presented findings are generally consistent with the notion that exchange rates are forward-looking asset prices.

Suggested Citation

  • Rasmus Fatum & Barry Scholnick, 2003. "Do Exchange Rates Respond to Day-to-Day Changes in Monetary Policy Expectations? Evidence from the Federal Funds Futures Market," EPRU Working Paper Series 03-18, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Aug 2003.
  • Handle: RePEc:kud:epruwp:03-18
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    File URL: http://www.econ.ku.dk/epru/files/wp/wp-03-18.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Owen F. Humpage, 2003. "Government intervention in the foreign exchange market," Working Paper 0315, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    expectations; monetary policy; federal funds futures; exchange rates;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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