The Relative Size of New Zealand Exchange Rate and Interest Rate Responses to News

26 Pages Posted: 16 Jun 2008

See all articles by Andrew Coleman

Andrew Coleman

Motu Economic and Public Policy Research Trust

Özer Karagedikli

Reserve Bank of New Zealand

Date Written: May 2008

Abstract

This paper examines the relative size of the effects of New Zealand monetary policy and macroeconomic data surprises on the spot exchange rate, 2 and 5 year swap rate differentials, and the synthetic forward exchange rate schedule. We find that the spot exchange rate and 5 year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5 year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered.

Keywords: news, exchange rates, interest rates, New Zealand

Suggested Citation

Coleman, Andrew and Karagedikli, Ozer, The Relative Size of New Zealand Exchange Rate and Interest Rate Responses to News (May 2008). Available at SSRN: https://ssrn.com/abstract=1146702 or http://dx.doi.org/10.2139/ssrn.1146702

Andrew Coleman (Contact Author)

Motu Economic and Public Policy Research Trust ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand

HOME PAGE: http://www.motu.org.nz

Ozer Karagedikli

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand
64 4-471-3792 (Phone)
64 4-473-1209 (Fax)

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