Monetary policy announcement shocks and high-frequency exchange rate dynamics: evidence from the euro area
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Bachelor's thesis
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Date
2023
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Mcode
Degree programme
Rahoitus
Language
en
Pages
31 + 2
Series
Abstract
This thesis investigates the immediate impact of the European Central Bank’s monetary policy announcement shocks on the exchange rates. I specifically focus on the impact of tightening and easing announcement shocks on the high-frequency exchange rates in the euro area for the period 1999-2023. I identify shocks by the reaction of one- and threemonth Overnight Index Swap rates to policy announcements. I conduct the event study by performing regression analysis on three exchange rate pairs: EURUSD, EURGBP, and EURJPY. I find a statistically significant relationship between the European Central Bank’s monetary policy announcement shocks and the exchange rate movements during the press release window. My finding indicates that, on average, a 100-basis point monetary policy announcement shock results in an immediate 3-4% appreciation of the exchange rate. Additionally, I observe that the currency pairs react to shocks with varying magnitudes. While monetary policy shocks do have a significant impact on exchange rate movements, there are also other factors that my model does not capture.Description
Thesis advisor
Luotonen, NiiloKeywords
exchange rate, monetary policy, monetary policy announcement, interest rate, European Central Bank, high-frequency data