Unconventional Monetary Policy and the Dollar: Conventional Signs, Unconventional Magnitudes

Transcription

1 Unconvenional Moneary Policy and he Dollar: Convenional Signs, Unconvenional Magniudes Reuven Glick a and Sylvain Leduc b a Federal Reserve Bank of San Francisco b Bank of Canada We examine he effecs of unconvenional moneary policy surprises on he value of he dollar using high-frequency inraday daa and conras hem wih he effecs of convenional policy ools. Idenifying moneary policy surprises from changes in ineres rae fuure prices in narrow windows around policy announcemens, we find ha moneary policy surprises since he Federal Reserve lowered is policy rae o he effecive lower bound have had larger effecs on he value of he dollar. In paricular, we documen ha he impac on he dollar has been roughly hree o four imes ha following convenional policy changes prior o he financial crisis. JEL Codes: E5, E43, F Inroducion During he financial crisis and is afermah, he Federal Reserve inroduced new moneary policy measures o sabilize We hank Sefania D Amico for providing us wih her measure of federal funds rae policy surprises. We hank Neil Gersein, Daniel Molior, and Jeremy Pearce for excellen research assisance. We also hank paricipans a he Peerson Insiue for Inernaional Economics Symposium on Spillovers of Unconvenional Moneary Policy for commens. The views expressed here are hose of he auhors and do no necessarily represen hose of he Federal Reserve Bank of San Francisco, he Board of Governors of he Federal Reserve Sysem, or he Bank of Canada. Auhor conac: Glick: Federal Reserve Bank of San Francisco, 101 Marke Sree, San Francisco, CA, 94105; Tel.: (415) ; reuven.glick@sf.frb.org. Leduc: Bank of Canada, 234 Laurier Avenue Wes, Oawa, Onario K1A 0G9; Tel.: (613) ; SLeduc@bankbanque-canada.ca. 103

2 104 Inernaional Journal of Cenral Banking December 2018 financial markes and miigae he effecs of he crisis on economic aciviy. These so-called unconvenional policy ools have been necessary boh because of he exraordinary naure of he financial crisis and because he federal funds policy rae was quickly dropped o is effecive lower bound of near 0 percen by he end of As a resul, he Federal Reserve urned o large-scale asse purchases (LSAPs) also commonly called quaniaive easing and o greaer forward guidance abou he fuure pah of moneary policy o achieve is dual mandae of price sabiliy and maximum employmen. These new policy ools came wih a significan amoun of uncerainy regarding heir effeciveness, paricularly wheher he sandard ransmission channels of moneary policy hrough financial asse markes work as well as hey did in he pas. An imporan channel hrough which changes in moneary policy affec he economy, paricularly when he policy rae is near is lower bound, is he value of domesic currency. There is much empirical evidence, for insance, documening ha he dollar ypically depreciaed following declines in he federal funds rae in he pre-crisis period (see, for insance, Clarida and Galí 1994; Eichenbaum and Evans 1995; Faus and Rogers 2003; Scholl and Uhlig 2008; and Bouakez and Normandin 2010). In his paper, we examine how he U.S. dollar has reaced o changes in unconvenional moneary policy since he federal funds rae reached is zero lower bound in December 2008 and how his effec compares wih hose following changes in moneary policy in he period before hen. In paricular, we analyze he impac of moneary policy announcemens beween 1994 and 2014, hus capuring he effecs of he hree waves of quaniaive easing and he Mauriy Exension Program. We use high-frequency inraday daa in panel regressions o sudy he dollar s movemens agains he currencies of major U.S. rading parners in ime inervals immediaely following moneary policy announcemens by he Federal Reserve. The use of inraday daa enables us o beer isolae he response of he dollar o moneary announcemens from oher possible deerminans. To conrol for he likelihood ha marke paricipans anicipae policy changes, we consruc surprise changes in moneary policy using changes in shor-erm and long-erm ineres rae fuures around he ime of policy announcemens.

3 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 105 We compue hree ypes of moneary policy surprises. We firs use changes in federal funds rae fuures around Federal Open Marke Commiee (FOMC) announcemens abou he arge federal funds rae o measure surprises in he policy arge, ermed arge surprises by Kuner (2001). 1 Clearly, arge surprises are only relevan during he pre-crisis period when he federal funds rae was above he zero lower bound. Second, as emphasized by Gürkaynak, Sack, and Swanson (2005), FOMC announcemens no only conain informaion abou he policy arge, bu also include communicaion abou he fuure pah of moneary policy. As a resul, we follow heir approach o isolae he surprise movemens in he expeced pah of he federal funds rae, as measured by he change in he one-year-ahead Eurodollar fuures rae, which we label shor-erm pah surprises. Third, we consruc an addiional measure of policy pah surprises, which we erm long-erm pah surprises, using long-erm Treasury fuures raes. The idea is ha hese surprises may capure he Federal Reserve s aemps o direcly influence long-erm Treasury raes via LSAPs (see Wrigh 2012). Since he pre-crisis period was dominaed by he use of changes in he level and pah of he arge federal funds rae as he main ool of moneary policy, we refer o his period as he convenional policy period. Correspondingly, we denoe he crisis and pos-crisis period when LSAPs and relaed policies were he main ools of moneary policy as he unconvenional policy period. Our resuls show ha he exchange rae channel of he ransmission of moneary policy is highly effecive during boh he convenional and unconvenional policy periods, bu ha he effecs are significanly larger in he laer period. In paricular, we firs documen ha during he convenional period he U.S. dollar depreciaed significanly in response o boh arge and shor-erm pah surprises, hough no in response o longerm surprises. Specifically, we find ha a 100 basis poin (bps) surprise easing leads o a oal decline of 2.4 percen in he value of he dollar in he hour afer announcemens. In comparison, during he unconvenional policy period, he U.S. dollar depreciaed significanly in response o boh shor-erm and long-erm pah 1 See also Bernanke and Kuner (2005), Fleming and Piazzesi (2005), Faus e al. (2007), and D Amico and Farka (2011) for oher analyses of he effecs of moneary policy arge surprises during he period before he financial crisis.

4 106 Inernaional Journal of Cenral Banking December 2018 surprises, wih arge surprises no longer a feasible ool of moneary policy as long as he federal funds rae was expeced o remain a is effecive lower bound. Since he end of 2008, we find ha a 100 basis poin surprise easing in unconvenional policy leads o a oal decline of 8.8 percen in he value of he dollar wihin sixy minues, a magniude roughly four imes ha during he convenional period. Our paper adds o a growing and acive lieraure on he effecs of unconvenional moneary policy. Saring wih Gagnon e al. (2011), several papers have aemped o analyze he effeciveness of recen moneary policy acions wih even sudies of Federal Reserve announcemens; see, for insance, Krishnamurhy and Vissing- Jorgensen (2011), D Amico e al. (2012), Glick and Leduc (2012), Li and Wei (2012), Hamilon and Wu (2015), and Neely (2015). By emphasizing he effecs on he U.S. exchange rae, our work is relaed o ha of Wrigh (2012) and Neely (2015), who look a he impac of announcemens of large-scale asse purchases and oher announcemens by he Federal Reserve on he dollar. However, our focus is differen, as we seek o compare he effec of surprise changes in unconvenional policy, including boh shor-erm and long-erm pah surprises, on he exchange rae wih hose during he convenional period. While our approach parly follows Wrigh s mehodology in consrucing moneary policy pah surprises, we also make an addiional disincion beween shor-erm and longerm pah surprises. In addiion, our work differs from Neely s in ha i conrols for marke expecaions of possible changes in moneary policy, which is imporan o precisely idenify he surprise componen of policy announcemens. We also have he benefi of working wih a longer sample ha includes policy announcemens during he firs, second, and hird rounds of large-scale asse purchases beween 2008 and Neely s sample covers only he firs round of LSAPs beween November 2008 and November 2009, while Wrigh s sample of weny-eigh observaions exends o Sepember 2011 o encompass he second round, bu no he hird round. 2 2 See also Rogers, Scoi, and Wrigh (2014), who examine he effecs of unconvenional policies by he Federal Reserve, he European Cenral Bank (ECB), he Bank of England, and he Bank of Japan on bond yields and sock prices, in addiion o hose on exchange raes. Bowman, Londono, and Sapriza (2014) examine he effecs of unconvenional U.S. moneary policies on asse prices in emerging markes, including exchange raes.

5 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 107 Finally, our approach here differs from ha followed in previous work of ours (Glick and Leduc 2013) which absraced from he ransmission of moneary policy via pah surprises during he convenional period. Taking hese surprises ino accoun alers he comparison of he effecs of moneary surprises on he dollar across regimes, which we now find o be subsanially larger during he unconvenional period. In addiion, our mehodological approach differs in ha in his paper we employ a pooled panel ha includes observaions from boh he convenional and unconvenional periods. This enables nesed ess o direcly compare he effeciveness of policies across periods. The paper is organized as follows. In secion 2 we describe our daa and measures of moneary surprises. Secion 3 presens he benchmark empirical resuls for he effecs of unconvenional and convenional moneary policy on he value of he dollar. Robusness exercises are repored in secion 4. Secion 5 concludes. 2. Idenificaion of Moneary Policy Evens and Surprises 2.1 Idenifying Moneary Policy Surprises We examine he effecs of moneary policy surprises on he value of he U.S. dollar during he recen period when policymakers relied heavily on unconvenional policy ools, such as large-scale asse purchases and communicaions abou fuure policy acions he unconvenional policy period and conras hese effecs wih hose following policy surprises when he arge federal funds rae was above he zero lower bound he convenional policy period. The ransiion beween hese wo periods is somewha blurred, since convenional policy acions were sill being employed while he Federal Reserve s inenions o adop unconvenional measures were being signaled. For insance, while he FOMC lowered he federal funds rae o is effecive lower bound on December 16, 2008, he fuure use of unconvenional policy ools had already been indicaed by Chairman Bernanke in speeches in November and early December ha year. In our benchmark specificaion, we assume ha he convenional period ends in Ocober As a resul, hese speeches,

6 108 Inernaional Journal of Cenral Banking December 2018 which provided imporan informaion o marke paricipans abou he ype of unconvenional policies ha migh be pursued in he fuure, are included in he se of policy announcemens during he unconvenional period. One advanage of using his sample spli is ha i makes our sample of unconvenional policy announcemens more comparable o ha ypically used in he lieraure, as we discuss below. Neverheless, we also conduc sensiiviy analysis by conrolling for several imporan announcemens beween he end of Ocober and December 16, Thus, our sample period for convenional moneary policy acions exends from March 1994, when he FOMC began issuing a press release afer every meeing and every change in policy, unil Ocober The period characerized by unconvenional moneary policy acions spans he period from November 2008 o he end of our sample in December The exen o which an announcemen affecs he currency when i is released o he public depends on how much marke paricipans expec he announcemen. If marke paricipans fully anicipae he conen of an announcemen, hen no addiional informaion is revealed a he ime of he announcemen s release and he value of he dollar should no move as a resul. Therefore, conrolling for marke paricipans expecaions is crucial for our analysis. To idenify surprise changes in moneary policy, we use changes in ineres rae fuures in a igh ime inerval around moneary policy news. 3 Our benchmark sample includes unscheduled inermeeing announcemens on April 18, 1994; January 3, 2001; April 18, 2001; January 22, 2008; and Ocober 8, 2008, and excludes unscheduled announcemens made on Ocober 15, 1998 and Sepember 17, 2001, as well as hose on Augus 10, 2007; Augus 17, 2007; and March 11, The Ocober 15, 1998 even followed he Russian ruble devaluaion and he near collapse of Long-Term Capial Managemen, and governmen securiies markes were closed a he ime of he FOMC announcemen ha day. The Sepember 17, 2001 even was excluded as well, on he grounds ha asse marke responses a ha ime reflec no jus he effecs of he FOMC announcemen bu also he fac ha i was he firs day ha he federal funds rae marke was open afer he Sepember 11 erroris aack. Bernanke and Kuner (2005) and D Amico and Farka (2011) also exclude Ocober, 15, 1998 and Sepember 17, The unscheduled meeings of Augus 10, 2007; Augus 17, 2007; and March 11, 2008 are excluded because hese FOMC announcemens focused on providing deails abou liquidiy policies (for insance, abou he Term Aucion Faciliy or discoun window lending) or communicaed awareness of ongoing economic evens and did no announce policy changes.

7 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 109 For he convenional policy period, given ha moneary policy is parly conduced via changes in he arge for he federal funds rae, we follow he approach proposed in Kuner (2001) and use he change in federal funds rae fuures consruced by D Amico and Farka (2011) o idenify moneary policy surprises in he arge for he federal funds rae. 4 We refer o hem as arge surprises. To beer isolae he influence of changes in moneary policy, he procedure uses inraday ick daa o measure he change in federal funds rae fuures from en minues before a policy announcemen o weny minues afer. 5 This sraegy provides a good measure of moneary policy shocks if possible ineres risk premiums remain relaively consan around policy announcemens. However, as Gürkaynak, Sack, and Swanson (2005) have highlighed, FOMC announcemens during he convenional policy period no only conain informaion abou he curren arge for he federal funds rae, bu also include informaion abou he fuure pah of moneary policy. Following Gürkaynak, Sack, and Swanson (2005), we define he shor-erm pah surprises as he change in he one-year Eurodollar fuures rae around he ime of policy announcemens ha are orhogonal o he arge surprises. 6 For he pos-crisis period, idenifying moneary policy surprises wih he changes in federal funds rae fuures is no a feasible empirical sraegy as long as he federal funds rae is expeced o remain a is effecive lower bound and moneary policy is conduced hrough unconvenional means. However, pah surprises of he kind suggesed by Gürkaynak, Sack, and Swanson (2005) can be used o 4 Following Kuner (2001), we assume ha he federal funds fuures rae can be expressed as a weighed average of he rae prevailing so far in he monh and he expeced rae for he res of he monh, plus a risk premium. Assuming a consan risk premium implies ha our moneary surprise measure can be defined as he change in he fuures rae, adjused by he scale facor, D/(D d), where D is he number of days in he monh and d is he day in he monh of he moneary policy announcemen. We use his definiion as long as he announcemen occurs earlier han he las seven days of he monh. If he announcemen falls in he las seven days, he surprise is compued as he unadjused change in he nex-monh federal funds fuures conrac o avoid unduly large adjusmen facors. 5 This window represens he narrow window in D Amico and Farka (2011). They also considered wider windows, exending o sixy minues afer announcemens. We use he wider sixy-minue windows as a robusness check. 6 Specifically, we use ransacion prices for he Eurodollar conrac wih mauriy closes o one year.

8 110 Inernaional Journal of Cenral Banking December 2018 idenify policy surprises associaed wih forward guidance or LSAPs during he unconvenional policy period. In addiion, given he Federal Reserve s emphasis on direcly lowering long-erm ineres raes hrough unconvenional means, we differeniae beween shor-erm and long-erm pah surprises by also examining he change in longererm fuures raes around policy announcemens. More specifically, we define long-erm pah surprises as he change in he principal componen of he wo-, five-, en, and hiry-year Treasury-rae fuures, again measured during a hiry-minue window, from en minues before an announcemen o weny minues afer (see Wrigh 2012) 7,8. We examine he effec of long-erm pah surprises during he convenional as well as he unconvenional period since, despie he absence of LSAPs, policy announcemens during he convenional period may also conain informaion abou he fuure pah of policy ha is no capured by he shor-erm pah surprises. For he convenional period, we isolae he separae effecs of arge, shor-erm pah, and long-erm pah surprises by orhogonalizing (i) he shor-erm pah surprises wih respec o he arge surprises, and (ii) he long-erm pah surprises wih respec o boh he arge surprises and he shor-erm pah surprises. For he unconvenional period, we orhogonalize he long-erm pah surprises wih respec o he shor-erm pah surprises. All policy surprises are demeaned and defined such ha surprises wih a posiive sign indicae moneary easing, while surprises wih a negaive sign indicae moneary ighening. 7 We use he neares-dae fuures conracs on Treasury securiies from Tick Daa. The surprises were consruced from changes in he reurns on he wo-, five-, en-, and hiry-year bond fuures conracs, divided by he duraion of he cheapes-o-deliver securiy in he fuures baske, as gahered from Bloomberg. In our principal componens analysis of hese duraion-adjused yield changes, we ake he eigenvecor corresponding o he larges eigenvalue, i.e., he firs principal componen, and muliply each yield change by is respecive eigenvecor componen. I should be noed ha he bulk of Federal Reserve asse purchases during he hird LSAP round involved morgage-backed securiies. However, we do no have inraday daa on hese securiies since hey ypically are raded over he couner. 8 Wrigh (2012) uses a baseline surprise window from fifeen minues before a given Federal Reserve announcemen unil one hour and fory-five minues afer. Our surprise window ( 10, +20) was chosen o mach ha of he narrow measure of D Amico and Farka (2011) for federal fund surprises employed below. A wider surprise window is considered as a robusness exercise.

9 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 111 Overall, he news evens in he convenional policy period consis of 124 FOMC announcemens, 119 following scheduled meeings and 5 following unscheduled inermeeing communicaions. The series includes unscheduled meeings during his period only if he announcemens included informaion abou he federal funds arge (see able A1 in he appendix). 9 For he period characerized by unconvenional moneary policy, we use all FOMC announcemens beween December 2008 and December 2014 including boh regularly scheduled and some unscheduled meeings. We also include seleced speeches and esimonies given by Board of Governors Chairman Bernanke in which he signaled possible policy changes, paricularly hose suggesing modificaions o he Federal Reserve inenions o buy long-erm asses. Major announcemens ha refer o large-scale asse purchases as well as forward guidance news are lised in able The complee sample for he unconvenional policy period, which includes hese LSAP announcemens as well as oher announcemens following FOMC meeings, consiss of a oal of fify-six observaions. 11 Our sample encompasses announcemens used in oher sudies on he effecs of large-scale asse purchases and forward guidance. For insance, our announcemens associaed wih he firs round of large-scale asse purchases (LSAP1) beween December 16, 2008, and March 18, 2009 largely overlap wih hose used by Gagnon e al. (2011) and Neely (2015). Similarly, he five announcemens for he 9 The unscheduled meeings included in our measure are April 18, 1994; January 3, 2001; April 18, 2001; January 22, 2008; and Ocober 8, See foonoe 3 for more deails. We also analyze he impac of omiing hese observaions in secion We make use of he comprehensive liss of major announcemens in Rogers, Scoi, and Wrigh (2014), whose sample ends in mid-2013, and Haori, Schrimpf, and Sushko (2016), whose sample ends in April 2014, bu make several adjusmens. See he noes o able 1 for deails. 11 In addiion o he LSAP-relaed speeches by Chairman Bernanke cied in able 1, our sample also includes a speech on Augus 26, 2011, when he Chairman saed he Federal Reserve was considering all of is opions, hough he was no explici abou addiional policy acions. Rogers, Scoi, and Wrigh (2014) rea i as an LSAP-relaed even; we do no, and consequenly do no lis i in able 1. For he Bernanke speeches on November 25, 2008 and December 1, 2008, we impued values of 0 for he arge surprise measure, since here were no announcemens regarding he policy arge.

10 112 Inernaional Journal of Cenral Banking December 2018 Table 1. Federal Reserve Major LSAP and Forward Guidance Announcemens Dae Time EST FG Even Descripion 11/25/2008 8:15 a.m. N LSAP1 Inend purchases up o $100 billion in GSE agency deb and $500 billion in MBS 12/1/2008 1:40 p.m. N LSAP1 Bernanke speech (Ausin, Texas): open o purchase of long-erm Treasury securiies 12/16/2008 2:15 p.m. Y LSAP1 Targe federal funds rae lowered o 0 25 bps; low rae warraned for some ime ; may purchase long-erm Treasury securiies 1/28/2009 2:15 p.m. N LSAP1 Ready o expand purchases of agency deb and MBS, and purchase long-erm Treasury securiies 3/18/2009 2:15 p.m. Y LSAP1 Purchase addiional $750 billion in agency MBS and $100 billion in agency deb, and up o $300 billion in long-erm Treasury securiies; low funds rae for an exended period 8/10/2010 2:15 p.m. N LSAP2 Reinves MBS principal ino Treasury securiies as hey maure 8/27/ :00 a.m. N LSAP2 Bernanke speech (Jackson Hole): FOMC likely o buy more longer-erm securiies 9/21/2010 2:15 p.m. N LSAP2 Mainain reinvesmen policy and prepare o provide addiional accommodaion if needed 10/15/2010 8:15 a.m. N LSAP2 Bernanke speech (Federal Reserve Bank of Boson): easing o be coninued 11/3/2010 2:15 p.m. N LSAP2 Purchase $600 billion more in longer-erm Treasury securiies by end of 2011:Q2 8/9/2011 2:15 p.m. Y Low raes a leas unil mid /21/2011 2:15 p.m. N MEP Buy $400 billion of long-erm and sell equal amoun of shor-erm securiies by June /25/2012 2:15 p.m. Y Low raes a leas unil lae /20/2012 2:15 p.m. N MEP MEP exended unil end 2012 (coninued)

11 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 113 Table 1. (Coninued) Dae Time EST FG Even Descripion 8/31/ :00 a.m. N LSAP3 Bernanke speech (Jackson Hole): announces inenion for furher acion 9/13/ :30 pm. Y LSAP3 Purchase addiional agency MBS a pace of $40 billion per monh; low federal funds rae likely a leas hrough mid /12/ :30 p.m. Y LSAP3 Purchase longer-erm Treasury securiies a monhly rae of $45 billion; low raes if unemploymen above 6.5 percen and inflaion no more han 2.5 percen 5/22/ :30 a.m. N Taper Tanrum Bernanke esimony: FOMC likely o slow asse purchases laer in 2013 if economy and job marke coninue o improve 9/18/2013 2:15 p.m. N Exi Will relae pace of asse purchases o assessmen of coss and benefis as well as economic oulook 12/18/2013 2:15 p.m. Y Exi Taper monhly purchases of MBS o $30 billion and Treasury securiies o $35 billion; will reduce pace furher in measured seps ; abandoned hreshold of 6.5 percen unemploymen o keep raes low 3/19/2014 2:15 p.m. Y Exi Will keep funds rae low for a considerable ime afer asse purchase program ends 10/29/2014 2:15 p.m. Y Exi Asse purchase program ended; funds rae may remain below normal long-run level for some ime afer reaching employmen and inflaion arges 12/17/2014 2:15 p.m. Y Exi Will be paien in beginning o normalize policy Noes: FG denoes forward-guidance-relaed evens. The able relies on he lis of major announcemens in Rogers, Scoi, and Wrigh (2014, able 1), whose sample ends in mid-2013, augmened by Haori, Schrimpf, and Sushko (2016, able 1), whose sample ends in April To ha lis, we make several adjusmens. In paricular, we (i) follow he former in designaing MEP evens as announcemens involving new informaion abou he composiion and duraion of he program (Sepember 21, 2011 and June 20, 2012) and omi Augus 1, 2012, hough designaed by Haori, Schrimpf, and Sushko as an MEP even, since i yielded no new informaion abou asse purchases or forward guidance; (ii) rea Sepember 18, 2013 as an LSAP-relaed announcemen, since i did provide new informaion abou condiions for exiing from he asse purchase program; (iii) omi June 29, 2013; January 29, 2014; and April 30, 2014, hough designaed by Haori, Schrimpf, and Sushko as exi evens, since hey did no affec he expeced rae of apering during he LSAP exi phase; and (iv) add Ocober 29, 2014 and December 17, 2014 as forward-guidance-relaed exi announcemens ha occurred afer heir sample period ends.

12 114 Inernaional Journal of Cenral Banking December 2018 second round of asse purchases (LSAP2) from Augus 10 o November 3, 2010 are similar o hose used by Krishnamurhy and Vissing- Jorgensen (2011), Glick and Leduc (2012), and Wrigh (2012). In addiion, our analysis encompasses wo major announcemens associaed wih he Mauriy Exension Program (MEP) involving he sale of shor-erm Treasury securiies o purchase longer-erm asses for he Federal Reserve s balance shee, as well as he hird round of asse purchases (LSAP3), which was iniiaed in Sepember 2012 and ended in Ocober This round of announcemens also includes he congressional esimony of Chairman Bernanke on May 22, 2013, which led o he so-called aper anrum. Finally, we follow Haori, Schrimpf, and Sushko (2016) in our designaion of evens associaed wih adjusmens in forward guidance (FG) abou he pah of he federal funds rae. 2.2 Inraday Exchange Rae Movemens We conduc our analysis using inraday daa on currency fuures prices from Tick Daa for he days in our announcemen sample. The daa se conains minue-by-minue ick ransacion prices on foreign exchange conracs involving he U.S. dollar wih several currencies, including he Briish pound, he Canadian dollar, he euro, and he yen. 12 In 2010, hese four currencies accouned for over 70 percen of all spo dollar ransacions 13 and over 60 percen of all swap and fuures dollar ransacions (Bank for Inernaional Selemens 2010, Table D.1), while he counries issuing hese currencies accouned for abou 40 percen of U.S. bilaeral rade ransacions. One advanage of using inraday daa ha is paricularly relevan for moneary policy announcemens is ha i enables us o beer isolae heir effecs. For insance, many sudies of large-scale asse purchases by he Federal Reserve since 2008 have relied on daily daa o assess he effec of unconvenional moneary policy on he price of financial asses (see, for insance, Gagnon e al. 2011). This approach 12 These daa are based on conracs raded on he Chicago Board of Trade. We use he price of he neares, mos heavily raded fuures conrac on each announcemen day. In he case of he euro, we use he deuschmark before he euro s inroducion in The euro, yen, pound, and Canadian dollar accouned for 39, 15, 12, and 7 percen of spo ransacions, respecively.

13 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 115 assumes ha he marke effecs from a moneary announcemen will dominae effecs from any oher informaion released ha day. However, his assumpion may be paricularly roublesome for asse prices such as exchange raes, which reac naurally o news from around he world. Hence, i is more difficul o precisely uncover poenial links beween moneary policy announcemens and movemens in currency values using daily daa, as he effecs of oher news evens on he U.S. dollar are likely o confound hose from moneary policy. For insance, sudying he effecs of he European Cenral Bank (ECB) Securiies Marke Programme on sovereign yields, Ghysels e al. (2014) found ha he use of inerday daa masks he significan effecs ha he ECB s inervenions had on sovereign yields ha only could be deeced using higher-frequency inraday daa. Consequenly, we look a movemens in he value of he U.S. dollar agains foreign currencies in relaively narrow ime inervals. Consisen wih our idenificaion of moneary policy surprises, we use response windows around moneary policy announcemens of hiry minues (en minues before, unil weny minues afer) and seveny minues (en minues before, unil sixy minues afer). Using igh ime inervals helps us isolae he effecs of he moneary announcemens from oher possible deerminans of currency values, assuming hese announcemens rapidly influence he views of marke paricipans and are quickly refleced in he value of he dollar. For comparison, we also repor resuls exending he response surprise windows o weny-four hours afer announcemens. 3. Resuls 3.1 Changes in Value of he Dollar during LSAP Rounds, MEP, and Taper Tanrum We begin our analysis by reporing he raw, i.e., acual, changes in he value of he dollar during he hree rounds of LSAPs. Figure 1 illusraes he inraday behavior of bilaeral exchange raes on seleced LSAP announcemen days. As shown in panel A, he dollar depreciaed sharply agains all four currencies on December 16, 2008, immediaely afer he 2:15 p.m. FOMC announcemen abou he deails of LSAP1. The dollar depreciaion was smaller following

14 116 Inernaional Journal of Cenral Banking December 2018 Figure 1. Inraday Response of Foreign Currency Value of Dollar, Seleced LSAP Days he seleced FOMC announcemens abou LSAP2 and LSAP3. In conras, he dollar appreciaed sharply during he aper anrum following Chairman Bernanke s congressional esimony on May 22, 2013, as markes evidenly inerpreed his discussion abou he fuure lifoff of he federal funds rae as a surprise moneary ighening. Table 2 repors changes in he value of he dollar vis-à-vis he pound, he Canadian dollar, he euro, and he yen in response o he major announcemens during he hree LSAP rounds, he MEP, and he aper anrum episode idenified in able 1. The response windows sar en minues before announcemens and end weny minues afer. Observe ha he dollar depreciaed agains hese currencies in response o announcemens during all hree LSAP rounds, and i appreciaed during he aper anrum episode. The appreciaion of he dollar agains he yen during LSAP3 is an excepion, likely because of he yen s srong appreciaion in he week before he Sepember 13, 2012 FOMC meeing and marke alk abou possible

15 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 117 Table 2. Average Inraday Change in Exchange Raes LSAP1 LSAP2 MEP LSAP3 Tanrum Briish Pound/$ Canadian Dollar/$ Euro/$ Japanese Yen/$ Inraday Trade-Weighed $ No. Obs Memo: Inerday Trade-Weighed $ Noes: Mean values are in basis poins. The inraday exchange rae response windows are measured from en minues before o weny minues afer announcemens. Negaive values indicae depreciaion of he dollar agains foreign exchange. LSAP and MEP round observaions are given in able 1; anrum day is May 22, Bank of Japan inervenion. In addiion, he dollar ended o appreciae following MEP announcemens, suggesing ha he impac of policy ighening a he shor end of he yield curve ouweighed he effec of policy loosening a longer mauriies. On a rade-weighed basis, he dollar depreciaed by an average of 62, 23, and 13 basis poins (bps) afer announcemens abou LSAP1, LSAP2, and LSAP3, respecively. 14 The relaively small effec under LSAP3 does no necessarily imply ha he Federal Reserve s LSAP3 moneary policy acions were ineffecive, since he markes may have anicipaed hese announcemens and incorporaed hem ino asse prices. This moivaes he need o conrol for he exen o which he announcemens were surprises o he marke. During he aper anrum episode, when markes inferred a greaer likelihood of Federal Reserve ighening in he near erm, he dollar appreciaed by 50 bps. Similarly, he rade-weighed dollar 14 We consruc rade weighs from he Inernaional Moneary Fund s Direcion of Trade Saisics daa in 2011 on U.S. bilaeral expors and impors wih he Unied Kingdom, Canada, he euro zone, and Japan, wih calculaed weighs of 0.07, 0.41, 0.39, and 0.13, respecively. Resuls from aking simple averages are comparable.

16 118 Inernaional Journal of Cenral Banking December 2018 appreciaed on average by 29 bps following MEP announcemens, consisen wih an average surprise ighening of he shor-erm pah measure, as we documen in he nex secion. For comparison, he able also shows oal changes in he iner day value of he dollar agains major currencies, as calculaed by he Board of Governors over he weny-four-hour period from he end of floor rading on he day prior o each announcemen (usually 2:30 p.m. EST) and he end of floor rading on he announcemen day. 15 Noe ha he inerday changes have he same signs bu are generally larger han he inraday changes measured over he even window periods. 3.2 Summary Saisics of Moneary Policy Surprises We begin our formal empirical analysis by reporing summary saisics for our moneary policy surprise measures, which are repored in able Observe ha during he convenional period arge surprises are on average posiive, implying unanicipaed policy easing, while shor-erm pah surprises are slighly negaive. The laer are similarly small during he unconvenional period, hough slighly posiive, on average. Noe ha he sandard deviaions of he shor-erm pah surprises during he wo periods are of comparable magniude. Similarly, long-erm pah surprises are roughly zero, on average, in boh periods, alhough heir sandard deviaion during he unconvenional period is larger han ha during he convenional one. A furher breakdown of he surprises during he hree LSAP rounds and he MEP indicaes ha his greaer variaion during he unconvenional period is primarily aribuable o LSAP1 announcemens. Table 3 also shows ha he shor-erm and long-erm pah surprises were on average posiive during he firs round of asse purchases, indicaing surprise easing, while he aper anrum episode was associaed wih surprise ighening. We also noe ha policy announcemens during he MEP resuled in surprise easing, on 15 Noe ha all of he LSAP evens repored in able 3 occurred before he end of rading on he day of announcemen. 16 Recall ha shor-erm surprises are orhogonalized agains arge surprises, and long-erm surprises are orhogonalized agains shor-erm and arge surprises, implying ha heir means over he full period are zero by consrucion.

17 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 119 Table 3. Moneary Policy Surprises, Summary Saisics Full Conven- Unconven- Sample ional ional LSAP1 LSAP2 MEP LSAP3 Tanrum Targe Surprise N/A 1.55 N/A N/A N/A N/A N/A N/A (9.00) Shor-Term Pah (6.34) (6.95) (4.76) (6.09) (1.94) (3.20) (1.61) Long-Term Pah (5.41) (4.15) (7.54) (20.18) (4.51) (1.68) (6.63) No. Obs Noes: Mean values are in basis poins, wih sandard deviaion in parenheses. Moneary policy surprises are measured from en minues before o weny minues afer announcemens. Posiive values indicae moneary easing. LSAP and MEP round observaions are given in able 1; anrum day is May 22, 2013.

18 120 Inernaional Journal of Cenral Banking December 2018 average, in he long erm, consisen wih he Federal Reserve purchases of long-erm Treasury securiies, and surprise ighening in he shor erm, as he Fed sold shor-erm Treasury securiies. Overall, we find hese summary saisics o be inuiive and consisen wih a sandard financial reading of he direcion of moneary policy during hese episodes. In principle, he yields underlying our policy surprises reflec marke reacions o informaion regarding boh LSAPs and he fuure pah of moneary policy, i.e., forward guidance. In heir analysis of Fed communicaion during he convenional period, Gürkaynak, Sack, and Swanson (2005) argue ha shor-erm pah surprises primarily capure Fed communicaion abou forward guidance. This evidence combined wih he fac ha he large-scale asse purchases conduced by he Federal Reserve during he unconvenional period mosly argeed long-erm asses paricularly enyear Treasury bonds suggess ha our shor-erm pah surprises mosly represen forward guidance announcemens, while he longerm pah surprises mosly represen LSAP announcemens. To assess his conjecure abou wha our surprise measures during he unconvenional period may be capuring, we regress shorerm and long-erm pah surprises (PS ST, PS LT, respecively) on separae 0 1 dummies for even days involving news abou forward guidance and major asse purchases, using he classificaion in able Because we are ineresed in seeing wha ype of announcemens affec he surprises and no wheher marke paricipans were surprised on he upside or downside, we use he absolue value of surprises o make he effecs independen of he sign. As shown in able 4, asse purchase announcemens have a significan effec only on long-erm pah surprises. This is inuiive since LSAPs were conduced mosly o lower long-erm bond 17 As lised in able 1, we classify en announcemens as conaining forward guidance informaion. We designae asse purchase evens as he sixeen announcemens relaed o he hree rounds of LSAPs, MEP, he aper anrum day (May 22, 2013), and he firs LSAP exi day (December 18, 2013), excluding hose daes also conveying forward guidance informaion, wih he hree excepions of December 16, 2008; March 18, 2009; and December 18, 2013, given heir imporance during he early phase and end of he unconvenional period. The gis of he resuls goes hrough if we eliminae hese hree overlapping announcemens from he asse purchase dummy, hough he esimaed effecs are somewha less significan.

19 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 121 Table 4. Effecs of Forward Guidance and Major Asse Purchase Announcemens on Moneary Surprises during Unconvenional Period Shor-Term Long-Term Surprises (PS ST ) Surprises (PS LT ) Forward Guidance (1.19) (1.91) Major Asse Purchases (1.01) (1.62) R Noes: Dependen variable is in absolue value erms. Robus sandard errors are in parenheses. *, **, and *** denoe significance a he 10 percen, 5 percen, and 1 percen levels, respecively. Designaion of forward guidance evens is given in able 1. Major asse purchase evens include LSAP1, LSAP2, LSAP3, MEP days, anrum day (May 22, 2013), and he firs LSAP3 aper day (December 18, 2013) in able 1, excluding hose days wih some forward guidance, wih excepions of December 16, 2008; March 18, 2009; and December 18, Consan is included bu no repored. Sample period is November 25, 2008 o December 17, yields. In addiion, he resuls indicae ha he shor-erm pah surprises respond o announcemens abou forward guidance during he unconvenional period, in line wih he resuls of Gürkaynak, Sack, and Swanson (2005) for he convenional period. Table 4 also repors ha news abou forward guidance affecs long-erm pah surprises as well. Thus, our long-erm pah surprise measure could reflec a combinaion of boh asse purchase and forward guidance announcemens during he unconvenional policy period. Fully separaing ou he pure effecs of forward guidance and asse purchases on our long-erm surprise measure is challenging in ligh of he relaively shor sample of observaions for he unconvenional period. However, Swanson (2016), who adaps he mehodology of Gürkaynak, Sack, and Swanson (2005) o decompose moneary policy announcemens ino forward guidance and LSAP componens, obains resuls similar o ours. Specifically, he finds ha while forward guidance and LSAPs boh have significan effecs on medium-erm (wo-, five-, and en-year mauriy) Treasury raes, only forward guidance has a significan effec on shor-erm (i.e., less han one year mauriy) Treasury securiies and Eurodollar raes.

20 122 Inernaional Journal of Cenral Banking December 2018 In he following analysis we offer some addiional evidence ha long-erm pah surprises mosly reflec LSAPs. In paricular, we show ha while long-erm pah surprises have a subsanial and significan impac on he dollar during he unconvenional period, heir effec on he dollar was negligible during he convenional period prior o he financial crisis, when hey were no used by he Federal Reserve as a policy insrumen. 3.3 Pooled Exchange Rae Effecs of Moneary Policy Surprises We esimae he effecs of surprise moneary policy announcemens on he value of he dollar agains he Briish pound, he Canadian dollar, he deuschemark/euro, and he yen using he following panel specificaion: ΔS i,,w = a 1,i + α 1 TS + β 1 PS ST + γ 1 PS LT + D u ( a2,i + β 2 PS ST + γ 2 PS LT ) + εi,, (1) where ΔS i,,w is he (log) change in he exchange beween currency i and he U.S. dollar a ime during a response ime window w. TS is he arge federal funds rae surprise, PS ST is he shor-erm pah surprise, PS LT is he long-erm pah surprise, a i are currency fixed effecs, and ε is an error erm. D u is a dummy variable ha is equal o one for he unconvenional period and is zero oherwise. The parameers α 1, β 1, and γ 1 represen he effecs of arge surprises, shor-erm pah surprises, and long-erm pah surprises on he dollar during he convenional period, respecively. Shifs in he impac of he shor- and long-erm pah surprises on he dollar during he unconvenional period compared wih he convenional one are capured by he parameers β 2 and γ 2. The effecs of he shorand long-erm pah surprises on he dollar during he unconvenional period are hus given by (β 1 + β 2 ) and (γ 1 + γ 2 ), respecively. Noe ha we assume ha here are no arge surprises during he unconvenional period afer he arge for he federal funds rae was se a is effecive lower bound We explicily absrac from arge surprises alogeher during he unconvenional policy period by including arge surprises hrough December 16, 2008 when he arge rae reached is effecive lower bound in he convenional period

21 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 123 As discussed in secion 2, posiive values of he moneary policy surprises are defined o indicae moneary easing surprises, while he exchange rae is defined as unis of foreign exchange per U.S. dollar, so ha a decrease in S indicaes a depreciaion of he dollar. Hence, negaive coefficien esimaes are consisen wih he finding ha moneary policy easing leads o a depreciaion of he dollar. To illusrae he relaionship beween he change in he exchange rae and he differen moneary surprises, figure 2 repors scaer plos of he change in he value of he dollar agains arge surprises, shor-erm pah surprises, and long-erm pah surprises for he convenional and unconvenional periods separaely. To convey he informaion compacly, we rade-weigh he dollar exchange raes agains he four currencies included in our analysis he Briish pound, he Canadian dollar, he euro, and he yen. Firs, observe ha he sample includes boh negaive i.e., unexpeced ighening as well as posiive i.e., unexpeced easing moneary surprises. The scaers indicae a clear negaive relaionship beween he dollar and moneary surprises, paricularly for he arge and he shor-erm pah surprises during he convenional period and for he shor- and long-erm pah surprises during he unconvenional period. Thus, surprise moneary loosening (ighening) is associaed wih dollar depreciaion (appreciaion), he more so he greaer he surprise. In addiion, we noe ha he dollar appeared o move subsanially more in response o moneary surprises during he unconvenional period han during he convenional period. A more formal empirical analysis confirms his assessmen. Table 5 repors coefficien esimaes of equaion (1), using response windows of lenghs ranging from en minues before he announcemen o w = weny minues, one hour, and weny-four hours afer. of our sample. We effecively exclude hem from he res of he sample, since federal funds rae fuures were hinly raded during mos of he unconvenional period in our sample. Moreover, heir movemens more han likely did no represen expecaions of fuure policy changes, since given he amoun of excess reserves held by banks he federal funds rae ceased o be an effecive moneary policy ool. In secion 4.3 we conduc a sensiiviy analysis ha conrols for announcemens beween he end of Ocober and December 16, 2008.

22 124 Inernaional Journal of Cenral Banking December 2018 Figure 2. Moneary Policy Surprises and Exchange Rae Responses, +20 Minue Windows Noes: Posiive moneary surprises indicae easing. The inraday exchange rae response windows are measured from en minues before o weny minues afer announcemens. Negaive exchange rae responses indicae a depreciaion of he dollar agains foreign exchange.

23 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 125 Table 5. Moneary Policy Surprises and he Exchange Rae ΔS i,,w = a 1,i + α 1 TS + β 1 PS ST + D u (a 2,i + β 2 PS ST + γ 2 PS LT + γ 1 PS LT )+ε i, +20m +1h +24h TS (0.09) (0.07) (0.39) PS ST (0.11) (0.24) (0.09) PS LT (0.26) (0.37) (0.50) D u PS ST (0.33) (0.48) (1.09) D u PS LT (0.30) (0.18) (1.03) Memo: 1. β 1 + β (0.36) (0.59) (1.02) 2. γ 1 + γ (0.52) (0.47) (0.55) 3. α 1 + β 1 + γ (0.38) (0.64) (0.67) 4. β 1 + γ 1 + β 2 + γ (0.60) (0.56) (1.32) 5. Line 4 / Line R No. Obs Noes: Robus sandard errors are in parenheses. *, **, and *** denoe significance a he 10 percen, 5 percen, and 1 percen levels, respecively. Surprise windows are defined as en minues before o weny minues afer announcemens. Exchange rae response windows w for currency i are measured from en minues before o w = weny minues, one hour, and weny-four hours afer announcemen. Exchange rae changes and surprises are in basis poin unis, so he figures in he able can be inerpreed as he effec of a 1 basis poin surprise on he exchange rae in basis poins. A negaive coefficien indicaes dollar depreciaion. Sample period is February 4, 1994 o December 17, 2014.

24 126 Inernaional Journal of Cenral Banking December 2018 Consans are included in he regressions bu are no repored in he able for breviy. 19 We firs concenrae on he effec of policy surprises on he dollar during he convenional period. Table 5 indicaes ha he dollar is affeced via wo channels. Firs, a surprise easing of 100 bps in he arge federal funds rae leads o a 0.79 percen (i.e., 79 bps) decline in he value of he dollar one hour afer a policy announcemen and a 0.82 percen decline a day afer. However, he dollar is also affeced by surprise informaion abou he fuure pah of moneary policy. Specifically, we find ha a 100 bps easing in he shor-erm pah surprise during he convenional period leads he dollar o depreciae 1.35 percen one hour following announcemens and 2.02 percen one day afer. These effecs are saisically significan a he 1 percen level or lower. In conras, long-erm pah surprises did no have much impac on he exchange rae during he convenional period, as he esimaed magniude of γ 1 is small and barely significan a he 10 percen level only in he firs weny minues. These resuls are comparable o oher findings in he lieraure for he convenional period. For example, Hausman and Wongswan (2011) also found ha during he pre-crisis period he dollar ypically responded more o surprise announcemens abou he fuure pah of policy han o arge surprises. 20 We augmen heir finding wih he resul ha his forward-guidance-ype channel during he convenional policy period is capured solely by shor-erm pah surprises, as he dollar barely reacs o long-erm pah surprises. The ransmission of moneary policy o he exchange rae operaes differenly during he unconvenional policy period, wih he effecs of long-erm as well as shor-erm pah surprises boh being significanly larger han during he convenional period. More specifically, as able 5 indicaes upon summing he coefficien esimaes β 1 and β 2, a 100 bps shor-erm pah surprise leads o a 5.07 percen 19 The number of observaions in he panel is less han he maximum of (180 evens 4 individual bilaeral exchange raes =) 720 for some response windows when currency fuures daa are unavailable because he marke was closed. 20 Hausman and Wongswan (2011) examine he effecs of U.S. arge and shorerm pah moneary policy surprises on daily exchange rae changes for a panel of advanced and emerging economies during he convenional rae period from 1994 o They repor ha a 100 bps pah surprise leads on average o a 1.6 percen depreciaion of he dollar, comparable o our finding.

25 Vol. 14 No. 5 Unconvenional Moneary Policy and he Dollar 127 (7.25 percen) depreciaion one hour (weny-four hours) afer an announcemen, an effec far larger han during he convenional policy period. In addiion, we find ha long-erm pah surprises have effecs similar in magniude o he effecs of shor-erm pah surprises during he unconvenional policy period. Summing he coefficien esimaes γ 1 and γ 2 implies ha, in response o a 100 bps long-erm pah surprise, he dollar depreciaes by 3.73 percen (4.18 percen) one hour (weny-four hours) afer announcemen. The finding ha he dollar responds significanly o long-erm pah surprises as well as o shor-erm pah surprises during he unconvenional period is consisen wih he Federal Reserve s objecive of lowering long-erm ineres raes by purchasing long-erm asses in large amouns. In urn, he absence of such a program during he convenional period is consisen wih our finding ha he dollar did no reac significanly o long-erm pah surprises before he crisis. Overall, he inerpreaion of our resuls ha we favor is ha forward guidance operaes largely hrough he shor-erm surprises, while LSAPs operae mosly hrough long-erm pah surprises. As menioned above, able 4 presens evidence ha shor-erm pah surprises during he unconvenional period reac only o forward guidance announcemens. In addiion, he unresponsiveness of he exchange rae o long-erm pah surprises during he convenional period when LSAPs were no used provides addiional evidence suggesing ha LSAPs operae mosly hrough long-erm pah surprises. Our finding ha long-erm pah surprises significanly affec he value of he dollar during he unconvenional period is broadly in line wih he resuls repored in Wrigh (2012) and Rogers, Scoi, and Wrigh (2014). 21 To compare he magniude of he effecs of policy surprises during he convenional and unconvenional periods, we assume ha a ypical FOMC announcemen during boh periods 21 Bowman, Londono, and Sapriza (2014) analyze he effecs of U.S. long-erm pah surprises on asse markes prices, including exchange raes, in emerging markes during he unconvenional period. In an even sudy, hey find evidence ha emerging marke currencies responded over wo-day windows around U.S. moneary policy announcemens. In a panel sudy, hey find ha hese effecs are smaller (and no saisically significan) afer conrolling for counry-specific characerisics ha affec vulnerabiliy o changes in U.S. moneary policy.