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The Impact of Monetary Policy on the Exchange Rate: A Study Using Intraday Data

Author

Listed:
  • Jonathan Kearns

    (Reserve Bank of Australia)

  • Phil Manners

    (Reserve Bank of Australia)

Abstract

This paper uses intraday data to estimate the effect of changes in monetary policy on the exchange rate. We use an event study with carefully selected sample periods for four countries (Australia, Canada, New Zealand and the United Kingdom) to ensure that the change in monetary policy is exogenous to the exchange rate. Intraday data allow us to use a short event window, which improves the accuracy of estimates, and demonstrates that the change in policy is rapidly incorporated into the exchange rate. On average, an unanticipated tightening of 25 basis points is found to appreciate the exchange rate by around 0.35 per cent, with estimates for the individual countries ranging from ¼–½ of a per cent. The estimation indicates that monetary policy changes account for only a small part of the observed variability of exchange rates in these countries. We also find that changes in monetary policy have substantially different effects on the exchange rate depending on how they alter expectations regarding future policy. Surprises that cause expectations of future policy to be revised by the full amount of the surprise are found to have a larger impact on the exchange rate (around 0.4 per cent) than surprises that only bring forward an anticipated change in policy and do not change expectations of future policy (around 0.2 per cent).

Suggested Citation

  • Jonathan Kearns & Phil Manners, 2005. "The Impact of Monetary Policy on the Exchange Rate: A Study Using Intraday Data," RBA Research Discussion Papers rdp2005-02, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2005-02
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    exchange rates; monetary policy; intraday data;
    All these keywords.

    JEL classification:

    • 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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