Research Discussion Papers, Bank of Finland
No 2/2006:
Policy words and policy deeds: the ECB and the euro
Pierre Siklos ()
and Martin Bohl ()
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 recognises 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.
Keywords: communication policy; exchange rates; interest rates; volatility; (follow links to similar papers)
JEL-Codes: E50; E60; F30; (follow links to similar papers)
48 pages, April 11, 2006
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