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Monetary Actions, Intervention, and Exchange Rates: A Re-examination of the Empirical Relationships Using Federal Funds Rate Target DataCatherine Bonser-Neal |
Abstract In this paper, we re-examine the results of recent empirical studies on the relationships among Federal Reserve monetary-policy actions, U.S. interventions in currency markets, and exchange rates. Our approach differs from those used in other recent studies in several respects. First, we use changes in the Federal Reserve's federal funds rate target as our measure of monetary-policy actions. Second, we use an event-study methodology to estimate exchange-rate responses to monetary policy actions. Finally, we estimate relations using federal funds rate target changes only in periods in which the Federal Reserve used the federal funds rate to implement monetary policy. Our results suggest that the immediate responses of exchange rates to U.S. monetary policy actions are statistically and economically significant in a majority of cases. This result differs from those reported recently using VAR methodologies. Moreover, when we combine our spot and forward exchange-rate responses, we are not able to reject the overshooting hypothesis in seven of eight instances. In contrast, recent VAR studies estimate exchange-rate response patterns inconsistent with overshooting. We also re-examine the interaction between U.S. interventions and Federal Reserve monetary-policy actions. In this case, we obtain results consistent with recent studies. In particular, we cannot reject either the policy-signaling or the leaning-against-the-wind hypotheses of intervention effects. Finally, we find that our estimates of exchange-rate responses to federal funds rate target changes are virtually unaffected when we control for central-bank interventions. Catherine Bonser-Neal is an associate professor at Indiana University School of Business at Indianapolis, V. Vance Roley is the Hughes M. Blake Professor of Business at the University of Washington and a visiting scholar at the Federal Reserve Bank of Kansas City, and Gordon H. Sellon, Jr., is an assistant vice president and economist at the Federal Reserve Bank of Kansas City. We are grateful to Kathryn Dewenter, Charles Engel, Craig Hakkio, Glenn Rudebusch, and Mark Spiegel for helpful comments on a previous draft of this paper. The views expressed herein are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Board of Governors of the Federal Reserve System.Bonser-Neal e-mail: cneal@indyvax.iupui.edu
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