Policy Words and Policy Deeds: The ECB and the Euro

International Journal of Finance and Economics, Forthcoming

45 Pages Posted: 13 Aug 2007

See all articles by Pierre L. Siklos

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Martin T. Bohl

University of Muenster

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Abstract

This paper examines the role of the ECB communication activities on daily Eurodollar exchange rate and interest rates. We estimate the relationship between monetary policy and the exchange rate using a technique that explicitly recognizes the joint determination of both the levels and volatilities of these variables. We also consider more traditional estimation strategies as a test of the robustness of our main results. We introduce a new indicator of ECB communications policies that focuses on what the ECB says about the future economic outlook for the euro area along five different economic dimensions. The impact of ECB communications policies is more apparent in the time series framework than in the heteroskedasticity estimator approach. Time series estimates reveal that interest rate changes generally have a much larger impact on exchange rate movements, and their volatility, than do ECB verbal pronouncements. Previous studies that conclude that news effects are significant at the daily frequency may have reached such a conclusion because the measurement of news was too highly aggregated. The endogeneity of the exchange rate-interest rate relationship is more apparent when the proxy for monetary policy is the euro area-US differential than when any other proxy for monetary policy is employed.

Keywords: Central bank communication, Eurodollar exchange rate

JEL Classification: F3, E5, E6

Suggested Citation

Siklos, Pierre L. and Bohl, Martin T., Policy Words and Policy Deeds: The ECB and the Euro. International Journal of Finance and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1005687

Pierre L. Siklos (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
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Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

Martin T. Bohl

University of Muenster ( email )

Schlossplatz 2
D-48149 Muenster, D-48149
Germany

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