The Asymmetric Impact of Monetary Policy on Currency Markets

15 Pages Posted: 20 Nov 2006

See all articles by Bento J. Lobo

Bento J. Lobo

University of Tennessee, Chattanooga - Department of Accounting

Ali F. Darrat

Louisiana Tech University - College of Business

Sanjay Ramchander

Colorado State University, Fort Collins - Department of Finance & Real Estate

Abstract

This study examines whether tightening and easing actions of the Federal Reserve symmetrically influence currency markets. Using daily data on four exchange rates from 1989 to 2001, we find that changes in the Fed's interest rate target are positively related to changes in the value of the dollar. Surprises associated with monetary tightening have a larger announcement effect as compared to monetary easing for the British pound, German mark, and Canadian dollar, whereas the opposite is true for the Japanese yen. The results appear to be driven by the reactions of foreign central banks to Fed actions, the Fed's credibility as a policymaker, and by the change in the Fed's disclosure policy beginning in 1994.

Suggested Citation

Lobo, Bento J. and Darrat, Ali F. and Ramchander, Sanjay, The Asymmetric Impact of Monetary Policy on Currency Markets. Financial Review, Vol. 41, No. 2, pp. 289-303, May 2006, Available at SSRN: https://ssrn.com/abstract=945510 or http://dx.doi.org/10.1111/j.1540-6288.2006.00142.x

Bento J. Lobo (Contact Author)

University of Tennessee, Chattanooga - Department of Accounting ( email )

615 McCallie Avenue
Chattanooga, TN 37403-2598
United States

Ali F. Darrat

Louisiana Tech University - College of Business ( email )

Department of Economics & Finance
P.O. Box 10318
Ruston, LA 71272
United States
318-257-3874 (Phone)
318-257-4253 (Fax)

Sanjay Ramchander

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States
970-491-6681 (Phone)

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