Do Exchange Rates Respond to Day-to-Day Changes in Monetary Policy Expectations When No Monetary Policy Changes Occur?
Journal of Money, Credit and Banking, Vol. 38, No. 6, September 2006
University of Alberta School of Business Research Paper No. 2013-1149
26 Pages Posted: 9 May 2005 Last revised: 25 Jul 2013
Date Written: 2006
Abstract
This paper addresses whether exchange rates respond to changes in expectations of future US monetary policy when no actual monetary policy changes occur. We employ data on Federal funds futures contracts for extracting a measure of policy expectations, control for the surprise element of macroeconomic news and policy developments, and analyze more than 12 years of daily exchange rate data. Our findings show that continuous day-to-day changes in expectations of future monetary policy are associated in a highly significant and systematic way with day-to-day changes in exchange rates even when no actual monetary policy changes occur. This suggests that monetary policy matters for daily exchange rate determination in more ways than merely through infrequent, actual policy changes.
Keywords: Expectations, Monetary Policy, Federal Funds Futures, Exchange Rates
JEL Classification: E52, F31, G14
Suggested Citation: Suggested Citation
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