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Monetary Policy Announcements, Information Shocks, and Exchange Rate Dynamics

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Listed:
  • Daniel Gründler

    (University of Innsbruck)

  • Eric Mayer

    (University of Würzburg)

  • Johann Scharler

    (University of Innsbruck)

Abstract

We study nominal exchange rate dynamics in the aftermath of U.S. monetary policy announcements. Using high-frequency interest rate and stock price movements around FOMC announcements, we distinguish between pure monetary policy shocks and information shocks, which are associated with new information contained in the announcements. Contractionary pure policy shocks give rise to a strong, but transitory, appreciation on impact. Information shocks also appreciate the exchange rate, but the effect builds up only slowly over time and is highly persistent. Thus, we conclude that although the short-run effects on the exchange rate are primarily due to pure policy shocks, the medium-run response is driven by information effects.

Suggested Citation

  • Daniel Gründler & Eric Mayer & Johann Scharler, 2023. "Monetary Policy Announcements, Information Shocks, and Exchange Rate Dynamics," Open Economies Review, Springer, vol. 34(2), pages 341-369, April.
    • Handle: RePEc:kap:openec:v:34:y:2023:i:2:d:10.1007_s11079-022-09682-6
    DOI: 10.1007/s11079-022-09682-6
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    6. Carlos Alba & Julio A. Carrillo & Raúl Ibarra, 2024. "Information Effects of US Monetary Policy Announcements on Emerging Economies: Evidence from Mexico," Working Papers 2024-14, Banco de México.

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    More about this item

    Keywords

    Central bank information; High-frequency identification; Proxy-VAR; Exchange rate dynamics;
    All these keywords.

    JEL classification:

    • 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
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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