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

Victoria Bannikova ()
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Victoria Bannikova: Lomonosov Moscow State University

Russian Journal of Money and Finance, 2022, vol. 81, issue 3, 3-21

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.

Keywords: monetary surprises; press release; press conference; foreign exchange rate; information channel; regime switching; 'preserve the euro' effect; imperfect information (search for similar items in EconPapers)
JEL-codes: C24 E43 E44 E52 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:bkr:journl:v:81:y:2022:i:3:p:3-21

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