Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/215406
Authors: 
Franz, Thorsten
Year of Publication: 
2020
Series/Report no.: 
Bundesbank Discussion Paper 13/2020
Abstract: 
The dynamic effects of ECB announcements, disentangled into pure monetary policy and central bank information shocks, on the euro (EUR) exchange rate are examined using a Bayesian Proxy Vector Autoregressive (VAR) model fed with high-frequency data. Contractionary monetary policy shocks result in a sizable appreciation of the nominal effective and bilateral EUR exchange rates, peaking on impact. By contrast, despite similar effects on interest rate differentials, responses to central bank information shocks exhibit strong heterogeneities across currency pairs. This disparity can be rationalized by an increase in investors' risk appetite, as measured by the VIX, triggering capital flows into speculative currencies when the ECB reveals a surprisingly sanguine economic outlook. In line with this, the EUR depreciates against a high-yielding carry trade investment portfolio, while it appreciates against a low-yielding carry trade funding portfolio.
Subjects: 
central bank information
monetary policy
exchange rate
Proxy VAR
high-frequency data
carry trades
JEL: 
E52
E58
F31
ISBN: 
978-3-95729-685-6
Document Type: 
Working Paper

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