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Central bank information shocks and exchange rates

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  • Franz, Thorsten

Abstract

The dynamic effects of ECB announcements, disentangled into pure monetary policy and central bank information shocks, on the euro (EUR) exchange rate are examined using a Bayesian Proxy Vector Autoregressive (VAR) model fed with high-frequency data. Contractionary monetary policy shocks result in a sizable appreciation of the nominal effective and bilateral EUR exchange rates, peaking on impact. By contrast, despite similar effects on interest rate differentials, responses to central bank information shocks exhibit strong heterogeneities across currency pairs. This disparity can be rationalized by an increase in investors' risk appetite, as measured by the VIX, triggering capital flows into speculative currencies when the ECB reveals a surprisingly sanguine economic outlook. In line with this, the EUR depreciates against a high-yielding carry trade investment portfolio, while it appreciates against a low-yielding carry trade funding portfolio.

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  • Franz, Thorsten, 2020. "Central bank information shocks and exchange rates," Discussion Papers 13/2020, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:132020
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    Cited by:

    1. Jarociński, Marek, 2022. "Central bank information effects and transatlantic spillovers," Journal of International Economics, Elsevier, vol. 139(C).
    2. Marco Pinchetti & Andrzej Szczepaniak, 2024. "Global Spillovers of the Fed Information Effect," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(2), pages 773-819, June.
    3. Karau, Sören, 2021. "Monetary policy and Bitcoin," Discussion Papers 41/2021, Deutsche Bundesbank.
    4. Karau, Sören, 2023. "Monetary policy and Bitcoin," Journal of International Money and Finance, Elsevier, vol. 137(C).

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    More about this item

    Keywords

    central bank information; monetary policy; exchange rate; Proxy VAR; high-frequency data; carry trades;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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