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The High-Frequency Response of the Rand-Dollar Rate to Inflation Surprises

  • Greg Farrell

    ()

    (South African Reserve Bank and Wits University)

  • Shakill Hassan

    ()

    (South African Reserve Bank and University of Cape Town)

  • Nicola Viegi

    ()

    (Department of Economics, University of Pretoria)

We examine the high-frequency response of the rand-dollar nominal rate within ten-minute intervals around five minutes before, five minutes after) official inflation announcements, and show that the rand appreciates (respectively, depreciates) on impact when inflation is higher (respectively, lower) than expected. The effect only applies after the adoption of inflation targeting, and is stronger for good news. Our findings are rationalisable by the belief, among market participants, in a credible (though perhaps not particularly aggressive) inflation targeting policy in South Africa; and can be used to monitor changes in currency market perceptions about the monetary policy regime.

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File URL: http://www.up.ac.za/media/shared/61/WP/wp279.zp39565.pdf
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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201215.

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Length: 15 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:pre:wpaper:201215
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Web page: http://www.up.ac.za/economics

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  1. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
  2. Jon Faust & John H. Rogers & Shing-Yi B. Wang & Jonathan H. Wright, 2003. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," International Finance Discussion Papers 784, Board of Governors of the Federal Reserve System (U.S.).
  3. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  5. Richard Clarida & Daniel Waldman, 2007. "Is Bad News About Inflation Good News for the Exchange Rate?," NBER Working Papers 13010, National Bureau of Economic Research, Inc.
  6. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  7. Engel, Charles & West, Kenneth D., 2006. "Taylor Rules and the Deutschmark: Dollar Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1175-1194, August.
  8. Alberto Ortiz & Federico Sturzenegger, 2007. "Estimating Sarb'S Policy Reaction Rule," South African Journal of Economics, Economic Society of South Africa, vol. 75(4), pages 659-680, December.
  9. David K. Backus & Federico Gavazzoni & Christopher Telmer & Stanley E. Zin, 2010. "Monetary Policy and the Uncovered Interest Parity Puzzle," NBER Working Papers 16218, National Bureau of Economic Research, Inc.
  10. Johannes Fedderke & Philippe Flamand, 2005. "Macroeconomic News 'Surprises' and the Rand/Dollar Exchange Rate," Working Papers 18, Economic Research Southern Africa.
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