Unconventional monetary policy and the dollar–euro exchange rate: first results from time-series analysis

ABSTRACT

This article examines the impact on the US dollar–euro (USD–EUR) exchange rate of the unconventional monetary policy conducted by the US Federal Reserve (Fed) and the European Central Bank (ECB). To that end, we make use of time-series analysis to obtain a reasonable long-run and short run representation of the data generation process and use dummy variables to study how announcements about monetary policy changes can affect the USD–EUR exchange rate. Our results indicate that the announcement and subsequent implementation of such measures by the ECB would have caused an appreciation of the dollar, while those by the Fed would have caused a depreciation of the dollar.

KEYWORDS:

• Quantitative easing
• unconventional monetary policy
• announcements
• Federal Reserve Bank
• European Central Bank
• exchange rates

JEL CLASSIFICATION:

• C32
• E52
• E58
• F31
• G15

Acknowledgement

We would like to thank Marta Gómez-Puig for helpful comments and discussions.

Notes

¹ Note that an increase in the exchange rate implies a depreciation of the national currency (the US dollar) and an appreciation of foreign currency (the euro).

² These results were confirmed using the Kwiatkowski et al. (1992) tests, where the null is a stationary process against the alternative of a unit root.

Additional information

Funding

This work is supported by the Government of Spain [grant number ECO2011-23189].