Demir, Ishak (2012): ECB Policy Response to the Euro/US Dollar Exchange Rate.
Download (176kB) | Preview
The exchange rate is an important part of transmission mechanism in the determination of monetary policy because movements in the exchange rate have significant effect on the macroeconomy. Measuring the reaction of monetary policy to the movements in exchange rate has some difficulties due to the simultaneous response of monetary policy on the exchange rate and the possibility that both variables respond several other variables. This study will use an identification method based on the heteroscedasticity in the high-frequency data. In particular, shifts in the importance of exchange rate relative to monetary policy shocks, and the estimated changes in the covariance between the shocks that result, allow us to measure the reaction of interest rates to changes in exchange rates. This study comes up with unbiased estimates with heteroscedasticity based identification approach and results of this paper suggest that ECB systematically respond to the exchange rate movements but that quantitative effects are small. The empirical results indicate that a 1 point rise (fall) in the exchange rate tends to decrease (increase) the three-month interest rate by around 20 basis points. Small and negative reaction coefficient implies that ECB may respond to the movements in exchange rate only to the extent warranted by their impact on the macroeconomy, since it affects the expected inflation and future output path.
|Item Type:||MPRA Paper|
|Original Title:||ECB Policy Response to the Euro/US Dollar Exchange Rate|
|English Title:||ECB Policy Response to the Euro/US Dollar Exchange Rate|
|Keywords:||Monetary Policy, Exchange Rates, Identi�cation through Heteroscedasticity, European Central Bank, Monetary Policy Reaction|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General
|Depositing User:||İshak Demir|
|Date Deposited:||18 Feb 2012 20:04|
|Last Modified:||04 Feb 2016 23:19|
Ball, L. 1999. Policy Rules for Open Economies. in John B. Taylor, ed. Monetary Policy Rules. Chicago: University of Chicago Press.
Bernanke, B. and M. Gertler. 1999. "Monetary Policy and Asset Price Volatility". Federal Reserve Bank of Kansas City Economic Review,LXXXIV, 17-51.
Bernanke, B. and M. Gertler. 2001. "Should Central Banks Respond to Movements in Asset Prices?� American Economic Review Papers and Proceedings. XCI, 253-257.
Bohl Martin T. and et al. 2007. "Do Central Banks React to the Stock Market? The Case of the Bundesbank". Journal of Banking and Finance.31, 719-733.
Clarida, R., J. Gali and M. Gertler. 1998. "Monetary Policy Rules in Practice: Some International Evidence". European Economic Review.42, 1033-1067.
Filosa, Renato. 2001. "Monetary Policy Rules in Some Mature Emerging Economies". BIS Papers. 8, 39-68.
Frömmel, M. and F. Schobert. 2006. "Monetary Policy Rules in Central and Eastern Europe," Discussion paper, Hannover University. 341
Furlanetto, Francesco, 2008. "Does monetary policy react to asset prices? Some international evidence,"Working papers from Norges Bank. 2008/7.
Harris, D., L. Matyas. 1999. Introduction to the Generalized Method of Moments Estimation. In: Matyas, L. (Ed.), Generalized Method of Moments Estimation. Cambridge University Press, Cambridge.
Mohanty, M. S. and M. Klau. 2005. "Monetary Policy Rules in Emerging Market Economies: Issues and Evidence" in Monetary Policy and Macroeconomic Stabilization in Latin America, eds. Rolf J. Langhammer and Lucio Vinhas de Souza, The Kiel Institute.
Newey, W. and D. McFadden. 1994. " Large Sample Estimation and Hypothesis Testing". In: Engle, R., McFadden, D. (Eds.), Handbook of Econometrics. IV, 2113-2247.
Obstfeld, Maurice and Kenneth Rogo. 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives. 9(4),73-96.
Osawa, Naoto. 2006. "Monetary Policy Responses to the Exchange Rate:Empirical Evidence from Three East Asian In�ation-targeting Countries".Bank of Japan Working Papers Series.
Rigobon, R. 2003. �Identi�cation through Heteroscedasticity�. The Review of Economics and Statistics. 85, 777-792.
Rigobon R. and B. Sack. 2003. �Measuring the Reaction of Monetary Policy to the Stock Market�. Quarterly Journal of Economics. 118, 639-669.
Rigobon R. and B. Sack. 2004. �The Impact of Monetary Policy on Asset Prices�. Journal of Monetary Economics, 51 1553-1575.
Taylor, John. 2001. "The Role of the Exchange Rate in Monetary Policy Rules". American Economic Review. 91, 263-267.
Taylor, John. 2002. "The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules". Central Banking, Analysis, and Economic Policies Book Series, Monetary Policy: Rules and Transmission Mechanisms. (1st ed.), 4, 21-46.
Available Versions of this Item
- ECB Policy Response to the Euro/US Dollar Exchange Rate. (deposited 18 Feb 2012 20:04) [Currently Displayed]