Unconventional monetary policy and the dollar–euro exchange rate: further evidence from event studies

New evidence is presented on the impact on the US dollar–euro (USD–EUR) exchange rate of the unconventional monetary policy conducted by the US Federal Reserve (FED) and the European Central Bank (ECB). To that end, we employ an event study approach using daily the USD–EUR exchange rate for the period from 2 January 2007 to 31 January 2015. Our results indicate that the announcement and subsequent implementation of such measures by the ECB would have caused in general an appreciation of the dollar, while those by the FED would have caused a depreciation of the dollar.     

ECB monetary policy and the DM–dollar exchange rate: evidence from a Bayesian VAR

Since the start of the European Monetary Union (EMU) in January 1999, the DM has depreciated considerably against the currencies of major industrial countries. Whether there is a systematic failure of vector autoregressive (VAR) models fitted to the pre-EMU period to predict forward looking variables in the year 1999 is investigated. Conditional forecasts are used in order to capture the potential effects of real shocks and to assess the ECB's reaction to these shocks. The findings suggest that neither real shocks nor the actual ECB-policy reaction can explain the exchange-rate devaluation. This points to important effects of increased uncertainty following the regime shift resulting in an increased risk premium in the foreign exchange market.     

Portfolio flows and the US dollar–yen exchange rate

This paper investigates the effects of portfolio flows on the US dollar–Japanese yen exchange rate changes over the period 1988:01–2011:04. Using a time-varying transition probability Markov-switching framework, the results suggest that the impact of portfolio flows on the dollar–yen exchange rate changes is state-dependent. In particular, the results show that portfolio inflows from Japan toward the US, more than monetary variables, strengthen the probability of remaining in the dollar–yen appreciation (low volatility) state. Therefore, credit controls on the flows can be used as a policy tool to pursue economic and financial stability.     

A model of exchange rate policy: evidence for the US dollar–Greek drachma rate 1975–87

This paper represents an attempt to model movements of the exchange rate between the US dollar and Greek drachma. A stuctural model is set up, and then a reduced-form error correction(EC) speicifcation is derived. On the basis of co-integration test, the results do not support the existence of al long-run equilibrium relationship between the exchange rate and price differential. Furthermore, the instrumental variable estimation of the EC model indicates that the monetary authorities have pursued a short-run anti-inflationary exchange rate poilicy that appreciates the exchange rate in the presence of wage inflation as an attempt to mitigate the depreciating pressures on the domestic currency and thus to ease the adjustment required on Greek producers.     

“New” monetary policy instruments and exchange rate volatility

Turkish economy has been suffering from rises in financial flows since the last two decades that these flows have raised financial stability challenges across emerging economies including Turkey. Regarding the ability of the central banks to decrease the financial risks including volatile exchange rate, the Central Bank of the Republic of Turkey has designed and implemented a new policy mix. In this study, we investigated the effect of new policy instruments (IRC, RRR and ROM) on the volatilities of US dollar, euro, British pound and basket rate for Turkish economy between January 2, 2002 and December 9, 2014 by using ARMA-GARCH, ARMA-EGARCH and SWARCH models. From the estimation results, we could not reach enough evidence that the IRC and RRR instruments could decrease the volatilities of exchange rates under investigation while the ROM instrument was successful, especially on US dollar and basket rate. We also found strong evidence in favour of asymmetric volatility, indicating that the positive shocks led to greater exchange rate volatility than negative ones.     

Nonlinear adjustment in the real dollar–euro exchange rate: The role of the productivity differential as a fundamental

In this paper we analyze the influence of productivity differentials in the dynamics of the real dollar–euro exchange rate. Using nonlinear procedures for the estimation and testing of ESTAR models during the period 1970–2009 we find that the dollar–euro real exchange rate shows nonlinear mean reversion towards the fundamentals represented by the productivity differential. In addition, we provide evidence about the ability of this variable to capture the overvaluation and undervaluation of the dollar against the euro.     

Optimal monetary–fiscal policy in the euro area liquidity crisis

We build an euro-area level DSGE model featuring a liquidity shock in the sovereign bonds market to simulate the strong contraction in economic activity observed during the 2008–2009 crisis. In the model, a sudden deterioration of the liquidity property of sovereign bonds is associated with deep recession and deflation. Against this background we characterize optimal monetary and fiscal policy with full commitment. We find that the optimal policy contains three features: (i) the policy rate is lowered until hitting the zero lower bound (ZLB) and then is kept at the ZLB for more periods; (ii) a prolonged central bank’s balance-sheet expansion aimed at restoring the liquidity deteriorated; (iii) a counter-cyclical fiscal stimulus which offsets, to a large extent, the fall in private spending caused by the liquidity shock. Policy regimes involving (i), but not (ii) and (iii), are quite weak in stabilizing output gap and inflation. Monetary policy regimes such as full inflation-targeting or nominal GDP targeting perform remarkably well insofar as they are complemented with an optimally-implemented counter-cyclical fiscal policy. Our results tend to favour the view that, in case of recession, an euro-wide coordinated fiscal policy should supplement the role of the ECB in achieving its primary objective.     

Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate

This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative government spending, and real oil price to explain real exchange rate persistence. By using quarterly data over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the proposed hybrid model provides a coherent long-run relation to explain the dollar–yen exchange rate as opposed to the conventional monetary model.     

Are monetary policy shocks causal to bank health? Evidence from the euro area

Despite considerable efforts of the European Central Bank (ECB) to support bank intermediation after the 2008 financial crisis, the recovery of euro area banks remained incomplete. Although many studies indicate that central banks can influence the stock prices of firms through their policy actions and communication, a knowledge gap exists as to whether the ECB's monetary policy can influence bank health. Through a high-frequency identification approach, this study reveals that the causal effect of conventional monetary policy action and communication by the ECB on bank stock prices differed over time, whereas its influence on bank financing costs was robust. This study provides new evidence showing that information effects related to policy easing surprises in the aftermath of the 2008 financial crisis hampered the ECB efforts to improve bank health and that its Odyssean communication signals (related to forward-looking announcements of policy easing) supported bank health during this phase. Local projections suggest that the response of banks to monetary policy shocks displayed some persistence, where ECB policy surprises and communications that shifted up (down) the yield curve were normally positive (negative) for bank health. The findings solicit a new perspective when assessing the influence of the ECB's monetary policy measures on euro area banks.     

Empirical analysis of the monetary policy transmission through interest rate channel in China

With the deregulation of interest rates in China, the interest rate channel of monetary policy transmission is becoming more and more important. Firstly, this paper makes empirical studies on the transmission mechanism in China represented by the conventional interest rate channel of monetary policy transmission by using the Granger causality test. The result shows that there is no causality neither between investment expenditure and the market interest rate nor between household consumption and the market interest rate, which suggests that the transmission of monetary policy in China is impeded. Then the reasons from three aspects including interest rate liberalization, asset-backed securitization and household consumption behavior are analyzed.     

Forecasting inflation and tracking monetary policy in the euro area: does national information help?

The ECB target is set in terms of the year on year growth rate of the euro area Harmonized Index of Consumer Prices. Nonetheless, a good deal of attention is given to national data by market analysts when they try to anticipate monetary policy moves. In this paper we use the Generalized Dynamic Factor Model to develop a set of core inflation indicators that, combining national data with area wide information, allow us to answer two related questions. The first is whether country specific data actually bear any relevance for the future path of area wide price growth, over and above that already contained in area wide data. The second is whether to track ECB monetary policy decisions it is useful to take into account national information and not only area wide statistics. Within our empirical framework we find that once area wide information is properly taken into account the contribution of national idiosyncratic developments is negligible.     

Monetary policy and exchange market pressure–evidence from sub-Saharan Africa

The purpose of this study was to assess the impact of monetary policy on foreign exchange market pressure (EMP) in developing country contexts for some selected countries in sub-Saharan Africa (SSA) and to measure the ability of monetary policy to significantly address currency pressures that arise from trading on the global market. This study was motivated by the fact that most of the SSA countries are developing economies that have negative net export positions and stand to lose significantly from consistently deteriorating foreign exchange position. The study, therefore, employs a dynamic panel model to test the hypothesis that a tighter monetary policy stance lends strength to a currency and vice versa, using 20 SSA economies for the period from 1991 to 2010. This study finds a negative and significant relationship between monetary policy and EMP, implying an easing of EMP in the face of contractionary monetary policy. The findings also point to significant relations between aggregate output, levels of public debt, the current account balance, terms of trade and EMP. Findings of this study have important implications as regards the policy direction on exchange rate and currency management.     

Foreign exchange market interventions and the $–¥ exchange rate in the long run

This article examines whether foreign exchange market interventions conducted by the Bank of Japan are important for the dollar–yen exchange rate in the long run. We rely on a re-examination of the empirical performance of a monetary exchange rate model. This is basically not a new topic; however, we focus on two new questions. First, does the consideration of periods of massive interventions in the foreign exchange market uncover a potential long-run relationship between the exchange rate and its fundamentals? Second, do Forex interventions support the adjustment towards a long-run equilibrium value? Our results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long-run relationship to a significant degree. Furthermore, Forex interventions increase the speed of adjustment towards long-run equilibrium in some periods, particularly in periods of coordinated forex interventions. Our results indicate that only coordinated interventions seem to stabilize the dollar–yen exchange rate in a long-run perspective.     

Are there bubbles in Chinese RMB–dollar exchange rate? Evidence from generalized sup ADF tests

This article uses recently developed generalized sup ADF (GSADF) unit root tests into the analysis of nominal RMB–dollar exchange rates bubbles. Based on the results from the GSADF tests, we find strong evidence of explosive behaviour in the nominal exchange rate and investigate two bubbles there. The first bubble is during 2005–2006 which is determined neither by the relative prices of traded goods nor the relative price of nontraded goods. The second bubble busts in 2008 during subprime crisis period, and which is determined by the relative prices of traded goods but not the relative price of nontraded goods. There is no bubble before 2005 as the exchange rate is under fixed regime. As for this result, some expansionary monetary and fiscal policies are required in China since these are the most efficient and effective under a bubble burst scenario.     

Third-country exchange rate volatility and Japanese–US trade: evidence from industry-level data

As an important economic power globally as well as within Asia, Japan is susceptible to fluctuations in the yen versus both the dollar and its neighbours’ currencies. The resulting risk, from both sources, might, therefore, have important effects on Japanese trade. This study incorporates third-country exchange rate volatility (both yen-renminbi and dollar-renminbi) into a reduced form trade model for industry trade between the US and Japan. As was the case with a previous study that did not include these effects, our cointegration analysis finds that most industries are unaffected by risk. Third-country effects are, however, significant in a number of cases. Interestingly, a large share of US industries find that exports increase due to third-country risk, suggesting that this volatility is encouraging traders to reorient their trade markets by substitution.     

Why does monetary policy respond to the real exchange rate in small open economies? A Bayesian perspective

To estimate how monetary policy works in small open economies, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of small open economies (including Australia, Chile, Colombia, Peru, and New Zealand) is rather similar to that observed in closed economies. Our results also indicate, however, that there are strong differences due to the shocks from the international financial markets (mainly risk premium shocks). These differences explain most of the variability of the real exchange rate, which has important reallocation effects in the short run. Our results are consistent with an old idea from the Mundell–Fleming model: namely, a real depreciation to confront a risk premium shock is expansive or procyclical, in contradiction to the predictions of the balance sheet effect, the J curve effect, and the introduction of working capital into RBC models. In line with this last result, we have strong evidence that only in one of the five countries analyzed in this study does not intervene the real exchange rate, the case of New Zealand.     

Is the monetary policy rule responsive to exchange rate changes? The case of Indonesia,Malaysia, the Philippines,and Thailand

Extending Obstfeld and Rogoff (J Econ Perspect 9:73–96, 1995), Ball (Monetary policy rules, University of Chicago Press, pp. 127–144, 1999), Svensson (J Int Econ 50: 155–183, 2000), Taylor (Am Econ Rev 91: 263–267, 2001), Gali and Gertler (J Econ Perspect 21:25–46, 2007), and others, this paper finds that central banks in the Philippines and Thailand respond negatively to the current real exchange rate and positively to the lagged real exchange rate whereas central banks in Indonesia and Malaysia do not react to the current or lagged real exchange rate. For the Philippines and Thailand, the null hypothesis that the sum of the coefficients of the current and lagged real exchange rates is zero cannot be rejected at the 5% level. Central banks in these four countries respond positively to the inflation rate and the output gap, suggesting that the concept of a simple or an extended Taylor rule would apply to these countries. Monetary policy reaction functions for Indonesia and Thailand are steeper than those for Malaysia and the Philippines and would be more responsive to a change in the inflation rate.      

Monetary policy rules in Central and Eastern European Countries: Does the exchange rate matter?

We estimate monetary policy rules for six Central and Eastern European Countries (CEEC) during the period when they prepared for membership to the EU and monetary union. By taking changes in the policy settings explicitly into account and by splitting up the exchange rate impact into two different components we significantly improve estimation results for monetary policy rules in CEEC. We uncover that the focus of the interest rate setting behaviour in the Czech Republic, Hungary and Poland explicitly switched from defending the peg to targeting inflation. For Slovakia, however, there still seemed to be on ongoing focus on the exchange rate. Finally, Slovenia and, after a policy switch, Romania exhibit a solid relation with inflation as well.     

Do the ECB's introductory statements help predict monetary policy? Evidence from a tone analysis

In this paper, we examine whether a tone shock derived from European Central Bank communication helps predict ECB monetary policy decisions. To this purpose, we first use a bag-of-words approach and several dictionaries on the ECB's Introductory Statements to derive a measure of tone. Next, we orthogonalise the tone measure on the latest data available to market participants to compute the tone shock. Finally, we relate the tone shock to future ECB monetary policy decisions. We find that the tone shock is significantly and positively related to future ECB monetary policy decisions, even when controlling for market expectations of monetary policy and the Governing Council's inter-meeting communication. Further extensions show that the predictive ability of the tone shock is robust to (i) the normalization of the tone measure, (ii) alternative market expectations of monetary policy, and (iii) the horizon of macroeconomic variables used in the Taylor-type monetary policy rule. These findings highlight an additional channel through which ECB communication improves monetary policy predictability, suggesting that the ECB may have private information that it communicates through its Introductory Statements.     

Has monetary policy really become less effective in the euro area? A note

This paper applies a time-varying VAR model with stochastic volatility to the euro area. In contrast to the literature, we find that (i) monetary policy has not become less effective and that (ii) the expansionary policy that is currently pursued would not have resulted in a less severe recession in 2009.