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Modelling Monetary Surprises Impact on Exchange Rate in Euro Area: Role of Revision of Expectations

Author

Listed:
  • Victoria Bannikova

    (Lomonosov Moscow State University)

Abstract

The high-frequency approach is widely used in modelling the cause-and-effect relations between financial and macroeconomic variables. In addition to central bank announcements on the monetary policy stance, this approach takes into account other information conveyed to the market via communication. However, the variable nature of the information effects (changes in expectations, risk appetite, etc.) complicates assessment. To segregate different information effects, the impact of information components in monetary surprises on high-frequency foreign exchange rates is measured by combining non-linear models with factor analysis to identify the contribution of monetary policy. Based on data for high-frequency interest rate swaps, a 'preserve the euro' effect is found when the European Central Bank's communication amid monetary policy easing leads to a stronger euro. The approach presented helps partly explain one of the exchange rate puzzles identified using high-frequency data. Additionally, the results prove the plausibility of an assumption of imperfect information in modelling instant effects of monetary surprises.

Suggested Citation

  • Victoria Bannikova, 2022. "Modelling Monetary Surprises Impact on Exchange Rate in Euro Area: Role of Revision of Expectations," Russian Journal of Money and Finance, Bank of Russia, vol. 81(3), pages 3-21, September.
    • Handle: RePEc:bkr:journl:v:81:y:2022:i:3:p:3-21
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    monetary surprises; press release; press conference; foreign exchange rate; information channel; regime switching; 'preserve the euro' effect; imperfect information;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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